^^ Yeah. I understand, that was very strange but I did nothing except activating XML Sitemap module and it threw 500 Internal server error on the whole site.
Now I have successfully re-enabled XML Sitemap module and its working fine.
Now its creating sitemap.xml.gz file without any problem.
PS: I want to know if I disable "Dynamically Generate Sitemap" option, will your plugin automatically update sitemal.xml and .gz files whenever I change something on my website such as updating old article or posting new article? Or will I have to manually update sitemap?