Thanks for your reply CrossRoads. Well, I think that there is somekind of conflict in between Arduino.h & pins_Arduino.h file. I opened the pins_Arduino.h file in notepad++ tried to find out whats wrong but the contents are like huge mountains of puzzles. Still searching for the right direction.
Should I try with the 0020 version? Need to find it over internet. Official download page (http://arduino.cc/en/Main/Software) does not have the older versions before 1.0.
CrossRoads:
Give it a try with 1.0.1, can always go back to -0020 if it doesn't work.
avrdude.conf already has the info for atmega32.
You'll have to make a new boards.txt entry for the device.