Got it resolved, don't know the exact reason for it.
Steps to resolve:
1. Reinstall orientDB
2. At this point there will be no user defined in orientdb-server-config.xml. Add at least one user as below, with your own password
<user resources="*" password="whatever your want" name="root"/>
3. Save the file and start the server
4. Go to OrientDB Studio. It should ask for authentication.
5. Enter the username and password that you configured in step 2 above
6. One should be able to add new DB.
In earlier case (before re-install), i directly started OriendDB server, without setting user, so something got messed up. I think it should be clearly mention in Read Me or somewhere about above steps else its tough for new OrientDB guy to get resolve it.