The group was thought to be headed by Ramadan Shitij and Lirim Jakupi, a.k.a. Nazi, who escaped from Dubrava prison in Kosovo a few months ago.
The showdown took place in the villages of Brodec, Vesala and Vejce, near Tetovo, spokesman of the Macedonian Police Ivo Kotevski stated.
All police officers who took part in the operation escaped unharmed, it was also confirmed.
"The criminal group has been defeated," said Kotevski, adding that the police units are still in the increasingly volatile area, MIA news agency reported.
Five people were arrested, among them Habit Ahmeti, one of the leaders of the group Macedonia says is criminal. Heavy weapons and ammunition were also confiscated.
Police will now process the scene, and will later allow reporters to access the area.
Meanwhile, KFOR has increased its troop level on the Kosovo side of the border since the start of the Macedonian MUP operation early this morning.
The issue of a Macedonian helicopter allegedly shot down during the clashes remains unclear. While authorities in Skopje deny the reports, KFOR claims that a helicopter did go down in the area, but that it does not belong to the NATO forces in the province.
Security services claim that the Jakupi group was allowed to escape from prison with the help of "certain structures", in order to destabilize the region "should the Kosovo negotiations go in a direction these structures do not favor."
Jakupi is wanted in Macedonia for launching a rocket at a police station, killing a cab driver, and wounding three officers, as well as for putting the village of Volkovo under siege and threatening to "bomb Skopje".