Al Qaeda leader Osama bin Laden was hiding out in a mansion near a Pakistani military training academy and less than two hours' drive from Islamabad when he was killed in a dramatic CIA-led operation involving helicopters and ground troops on Sunday night.

The revelation that Bin Laden was sheltering inside Pakistan is likely to ratchet up pressure on Islamabad.

The country's arch-rival, India, was quick to comment, saying the news underlined its 'concern that terrorists belonging to different organisations find sanctuary in Pakistan'.

A Reuters photographer in the valley town of Abbotabad north of Islamabad said police had blocked the road leading to the area where the night-time raid at a huge compound took place.

'After midnight, a large number of commandos encircled the compound. Three helicopters were hovering overhead. All of a sudden there was firing towards the helicopters from the ground,' said Nasir Khan, a resident of the town.

'There was intense firing and then I saw one of the helicopters falling down,' said Khan, who had watched the dramatic scene unfold from his rooftop.

Senior Pakistani security officials said the operation, carried out at around 1:30 a.m., involved both helicopters and ground troops.

A Pakistani military helicopter crashed near Abbotabad on Sunday night, killing one and wounding two, according to local media. It was unclear if the crash was related to bin Laden's death, but witnesses reported gunshots and heavy firing before one of two low-flying helicopters crashed near the military academy.

Express 24/7 television showed an image of what it said was bin Laden shot in the head, his mouth pulled back in a grimace.

Bin Laden was the mastermind of the Sept 11, 2001 attacks that killed almost 3,000 people and put the United States on a decade-long war footing.

The fact bin Laden was apparently living in relative luxury not far from Islamabad could pose awkward questions for Pakistan.

Just 10 days ago Pakistan's army chief addressed army cadets at the academy near where bin Laden was killed, saying the country's military had broken the back of militants linked to Al Qaeda and the Taliban.

'For some time there will be a lot of tension between Washington and Islamabad because bin Laden seems to have been living here close to Islamabad,' said Imtiaz Gul, a security analyst.

'If the ISI had known then somebody within the ISI must have leaked this information,' Gul said, referring to the Pakistani intelligence agency. 'Pakistan will have to do a lot of damage control because the Americans have been reporting he is in Pakistan ... this is a serious blow to the credibility of Pakistan.'     

However, defence analyst and former general Talat Masood said the fact bin Laden was killed in a joint operation would limit the damage to Pakistan's image.

 'There should be a sigh of relief because this will take some pressure off of Pakistan,' said defence analyst and former general Talat Masood. 'Pakistan most probably has contributed to this, and Pakistan can take some credit for this -- being such an iconic figure, it's a great achievement.'     

Abbotabad is a popular summer resort, located in a valley surrounded by green hills near Pakistani Kashmir. Islamist militants, particularly those fighting in Indian-controlled Kashmir, used to have training camps near the town. - Reuters