Let's go one step at a time.
I installed some some software(don't remember the name) which showed the linux partitions on windows system which i downloaded from net. A seperate drive was created(R drive) and it showed grub folder contents only in it. I deleted the software but the drive did not disappear.
It would be helpful if you could remember what the software was. It seems from your description, that it was some sort of boot manager software?
I decided to delete the Linux from my system and deleted the Linux Partition using Partition Magic 8.
If you deleted the Linux partition and some or all of the boot reference files were on that partition, then this is why you are getting the grub "prompt." There are no grub reference files on the system anymore to allow grub to work. Of course, this is assuming that you installed the grub bootloader on the MBR of the hard drive.
After a few failed attempts of booting through XP cd, now the computer doesn't start atall. Even as i switch on the system power button, i don't see CPU fan rotating. I've a SATA hard drive(160GB) and when i start the computer with IDE hard drive(my spare drive) the system boots!
It sounds like you corrupted the hard drive with all the changes that you tried to do.
The XP installation disk will not read Linux partitions, if that is what is resident on the beginning of the hard drive. So, the installer fails, as it sees no valid fat32, NTFS or empty hard drive to work from.
Since you used PartitionMagic, did you make recovery floppy disks as recommended after the changes that you made? If so, use the floppy disks to boot the system and ascertain what partitions are on the disk and where they are. Do the boot disks bring up PM and the disk is seen as "bad" meaning that it can't determine valid or consistent partitions on the drive?