The two pillion riders fired indiscriminately, killing Bukhari and one of the PSOs on the spot, an eyewitness said.
One of his guards was also killed in the attack and another is critically injured, police told the BBC.
He added that he has spoken to Jammu and Kashmir Chief Minister Mehbooba Mufti and assured the killers would be punished.
It was not immediately clear how many gunmen attacked Bukhari, who earlier worked with The Hindu newspaper as its Kashmir correspondent.
Bukhari, a frequent contributor to the BBC News website, was attacked in his auto near the office of the Rising Kashmir newspaper, which he edited. He was a courageous heart who fought fearlessly for justice and peace in Jammu and Kashmir.
Shujaat Bukhari was given police protection since an attack on him in 2000.
Robert Mohoney, deputy executive director for the Committee to Protect Journalists (CPJ) described the killing as a "blatant attack on the freedom of the press".
The Editors Guild of India while condemning the attack called on the government to ensure safety and security for the media in the state.
While praying for his heavenly abode, JKLF chairman has expressed heartfelt condolences to the bereaved family.
Bukhari had been part of India's delegation for informal peace talks on Kashmir with Pakistani representatives held in Dubai past year.
"Forces inimical to restoring peace in the Kashmir valley have silenced a voice of reason, logic and peace", the Press Club of India said in a statement, mourning the loss of Bukhari.