they are running from him after their failed attempt to abduct Naruto. It happens on a hotel hallway where Naruto and Jiraiya are staying. At the last part of their (short)battle, Jiraiya uses a tecnique to make it appear they are inside his belly. Itachi, then, uses amaterasu, to burn the fleshy walls so that they can escape.
i believe Jiraiya has no knowledge about Itachi's true nature/intentions about him slaying the entire Uchiha clan.