Hi Ananthi,
To change Status values, use the Actions drop down and select Manage Choice Lists. This screen will show you all fields that use a Choice List in Defects and you can add or edit any value, then click Submit Changes.
The only process that will automatically change a Status is in Workflow: do you have any Workflow defined for Defects? You can find Workflow by going to Setup / Screen Layouts - select Defects (or any other area) then click on Workflow and State Transitions.
I'm not I understand the dialog box that you describe. Could you grab a screen shot please?
Thanks!