Thanks for reply Nobbir. Hovering over to the error symbol did not provide any tip about the type of error. However, after posting the problem here, I further noticed that none of the Spatial Statistics tools was working in ArcGIS 10. I did some more internet search and found out that such like situation may arise if the python was not properly installed. So, I separately installed python from the ArcGIS installation media and BINGO...... All the tools started working perfectly. Regards.
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