All,
It seemed to be NTLM authentication issue rather than web-service one.
So, all is good now.
Just to share it with everyone for NTLM authentication, you can use Authenticator.setDefault method and user name needs to be passed in following format:
"domainName\\userName" - where DomainName stands for the name where you want the user authentication to happen(I confused this with domain name of resource URL which I was trying to access).
e.g. If I am a user on "aaa.corp.aa.com" and needs to access intranet URL "http://yyy.com", then domainName to be used in code should be "aaa.corp.aa.com\\userName" and not "yyy.com\\userName".
This link provides more info
http://download.oracle.com/javase/6/docs/technotes/guides/net/http-auth.html.
In my case I did not have to do " -Dhttp.auth.preference="scheme" ", since there were 3 authentication schemes setup on Sharepoint Server...and if 1 failed it checked with second one and so on..
HTH.
Thanks
Chintan.