The probe follows a detailed investigation by the state police into the killing of Hilal Ahmad Dar, who the army had dubbed as a militant killed in a gunfight at Ashtingoo village in Bandipore.
The police has already detained a counter insurgent and his associate in connection with the killing.
The police probe, according to local press reports, has found that the counter insurgent, Mohammad Ramzan Bhat alias Rameez had hatched a 'conspiracy to eliminate Hilal for cash rewards'. The police is also investigating the source of the weapon found near Hilal's body.
Defence Minister A K Antony had himself ordered an enquiry into the killing, which triggered days of unrest in Bandipore district and a separatist called shutdown on Saturday.
The killing has also evoked widespread condemnation in Kashmir.
"The army authorities have ordered a thorough probe headed by a senior officer to investigate into the incident of Ashtingoo, Bandipora on the night of 24-25 July 2012, in which Hilal Ahmad Dar of Village Aloosa had died," a defence spokesman said in a statement on Monday evening.
"The probe will consider all the aspects of the incident including inputs from the awaam (public) and Jammu and Kashmir police and an earnest endeavour will be made to bring out the truth. Depending on the outcome of the investigations, action will be taken as per the law of the land," the statement said.
While reassuring of fair and transparent investigation into the incident, the army authorities reiterated that "the army is committed towards peace in the Valley and security, well being and dignity of the awaam".
"Notwithstanding the outcome of this incident, the army has conveyed its full sympathies towards the aggrieved family for the loss of life of Hilal Ahmad Dar," the statement added.
The army also stated that it is fully cooperating with the police investigations, the statement said.