Hello Santhosh,
the command
no ip proxy-arp
in interface configuration mode disables the proxy ARP feature described in RFC 1027.
When Proxy ARP is enabled on a router interface the router replies to ARP requests for IP addresses that are not in the IP subnet associated to the interface if the router has a route to them ( including a default route),
This feature allows a router to assist an host that is missing the configuration of a default gateway or it has a wrong subnet mask.
The price to pay is an increased ARP activity as the assisted host instead of doing a single ARP request for the default gateway performs an ARP request for whatever IP address it needs to talk with
The answer to all these ARP requests is the same an ARP reply containing the router interface MAC address.
In this way the assisted host is able to send traffic to the router even if it is missing a default gateway in its TCP/IP stack configuration.
see the doc
http://www.cisco.com/en/US/tech/tk648/tk361/technologies_tech_note09186a0080094adb.shtml
For security reasons proxy ARP disabling is recommended
Hope to help
Giuseppe
