I think you have select High Firewall in during installation process, so you can not do that in that way. try these commands

ipchains -F
ipchains -X
iptables -F
iptables -X

if u have ipchains or iptables then try these commands, and u can try both also.

I rectified it by editing the file /etc/xinetd.d/telnet file

No sysadmin in their right mind is going to leave the telnet
port open on any of their machines. There is a reason why it is deactivated
in a default xinetd installation: it is completely unsecure.

All usernames and passwords travel over the line *unencrypted*. Astute use
of a packet sniffer can enable a 3rd party to gain root shell access to your
machine and wreak havoc.

Please, do consider deactivating telnet again and going for ssh instead.
It's secure, all data including usernames and passwords is encrypted before
being sent over the line.

Please keep in mind that ipchains –F or Iptables –F will open your system wide.

Is there any way i can restrict the telnet ports to my subnet only .
If there some file which can help me on this (like *.allow and *.deny)
please tell me.

Would use those iptables that you may have just flushed.

Somethine like iptables –a INPUT –p tcp –s <your source ip address>/<mask> –dport 22 –j ACCEPT

But don’t use telnet, cause someone will be able to sniff your password in two seconds.

1 line in your firewall script will get you the protection you want
(assuming you're using iptables and that your default policy is DROP):

iptables -t filter -A INPUT -p tcp -s <your_subnet> --dport 23 \
-i <your_LAN_interface> -j ACCEPT

Example:

iptables -t filter -A INPUT -p tcp -s 192.168.1.0/24 --dport 23 \
-i eth0 -j ACCEPT

Don't know what the ipchains equivalent would be.

if u r using redhat.. check with /etc/x.inetd/ ..