City police chief Waseem Ahmed said officers found a large quantity of weapons and explosives in the apartment. He said the militants were planning terror attacks in Pakistan's biggest city.
Police taking part in the raid early Saturday told the militants to surrender, but they opened fire, Ahmed said. In the gunbattle that ensued, five militants were killed, five were wounded and six escaped in the darkness, he said.
"All the dead belonged to Baitullah Mehsud. They were planning to target the city for their terrorist activities," Ahmed said.
Mehsud is blamed for a series of suicide bombings across Pakistan that spokesmen for his group have said is retaliation for two military offensives against Taliban in the country's volatile northwest.
Troops are winding down their campaign to oust the Taliban from the Swat Valley region after two months of fighting and are turning their attention to a new offensive targeting Mehsud in his home territory of South Waziristan, in the tribal belt on the Afghan border.
Artillery and warplanes continued to bomb targets across South Waziristan on Saturday, killing 15 insurgents and wounding 13 more, intelligence officials said. They spoke on condition of anonymity because they were not authorized to speak to the media.
A Taliban commander, Qari Hussain Ahmad, confirmed the bombing, but denied that militants had been killed.
"The jets are bombing, but we have not suffered any loss," Hussain told The Associated Press by telephone.
The Taliban also came under attack in the Upper Dir region bordering Swat, where a 1,000-strong citizens' militia has killed an estimated two dozen militants and has others pinned down in the villages Ghazai Gay and Shatkas. The militia was formed early this month to avenge a mosque bombing that killed 33 people.
Police official Tahir Khan said militants in the villages attacked militia members on Saturday, ending a lull in the fighting that had lasted for about a week.
Malik Motabar Khan, a tribal elder who is leading the militia, said up to five militants were killed.
"We are here until we kill all of them or we expel them," Khan told The Associated Press.
The government has encouraged militias, known as lashkars, to take up arms against militants in their area to assist military forces.