It was the problem in the register.phtml..
To know go to Mage/customer/contollers/AccoutnController.php and find createPostAction().
And write the following line inside the function to print the data from the register form..
echo "<pre>";print_r($this->getRequest()->getPost());echo "</pre>";exit;
Then fill up the registration form and submit . You will find all the submitted data here . If you are not getting the password field then check the password element in register.phtml page, specially its name attribute.
Because the values are collected by its name.
And most important..if everything will be right then delete the line I have mentioned from that function.
Hope this helps..