Hi aazswapnil.
Is it a 16MHz Crystal or Resonator? What are the lfuse settings that you are using?
Here is a version of the Arduino IDE that has some pretty good features, but it also has the non Pico-Power 328 signature that you can bootload from:
http://arduino.cc/forum/index.php/topic,118440.0.html
All of the bootloaders I have worked with have the "blink" like sketch built into the flash, so I am unsure of what you are observing with the flashes (other than the inital fast flash of the Optiboot bootloader and the slow Duemilanove bootloader).