I changed the setting (for the first time) of the "Select activation type of newly registered users" from "Required Activation by User" to "Active Automatically", HOWEVER now I can't change/switch back the setting to "Required Activation by User". No matter setting I choose and hit GO, the setting remains "Active Automatically" now.

Note: I use XOOPS ver 2.0.7 with Koudanshi's PHPBB (hack).

Really appreciate any help on this. Thanks!

Koudanshi's phpbb hacks modify core files outside of the module folder. Without knowing what those modifications are, it would be hard to support your question without signifigant knowledge of the changes made. If you do not get an answer here, then you may have to go to bbpixel.com to get the solution you need.