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I was finally able to figure out the problem. The deal is that XOOPS implements a custom session handler that is initialized and set in ./include/common.php. This custom session handler writes all the sessions into the tabel xoops_session. I had created two seperate datases one for XOOPS, and one for my custom module.
Being new to PHP, I was setting the database to my the custom module database using "mysql_select_db", hence after my PHP script used to run, the active database used to point towards my custo module database.
At this point when the XOOPS custom session handler trys writting the session variables into the database, it fails since it is not able to find the xoops_session table.
The solution to this is that all SQL queries should contain the database name as well. This might be a trivial info, but for some of the newbies it might save some time.
Thanks!!