Federal home ministry and state officials said a special counter-insurgency unit was hit by a landmine blast while patrolling Malkangiri district, a known Maoist stronghold in the far south of Orissa.
"So far we can confirm 21 policemen belonging to special operations group were killed in the landmine blast," Gopal Nanda, Orissa's police chief, said.
"The policemen were travelling to locate landmines, as the rebels had organised roadblocks on a strategic road," he said, adding that fighting was continuing into the night.
Growing threat
A group of special commandos was attacked on a reservoir in the same area on June 29. That incident left around 35 dead and dozens injured.
In February, Maoists attacked Nayagarh, a town close to the provincial capital, Bhubaneswar, killing 13 policemen and looting weapons.
Rebel activity is mainly concentrated in Chhattisgarh state, which borders Orissa, but has spread to around half of India's 29 states.
Manmohan Singh, the Indian prime minister, has described the rebels, known here as Naxalites, as the biggest threat to the country's internal security.
New Delhi has refused to hold peace talks with the shadowy rebels unless they renounce violence, and has also struggled to come up with a strategy to battle the guerrillas.