Thanks all for your suggestions and comments... Few more requirements added to project and goal changed... Now How I am doing (Thought it would be helpful for someone else):
1) Now I am using single Master page for my main website and for multiple websites. 2) Now using single web.config for all the websites(main as well as sub-websites). Because as I have mentioned in my question... static websites are working fine but only problem in database driven websites.
I am not sure that this is the best practice(Who cares when you have no choice :p) but .. It has solved my problem
Last but not Least Thanks @Douglas Thomas and @Shirish ... I have tried this convert to application method on my local IIS and it worked perfectly but now as I have accomplished by other way ... I do not need to contact hosting company [ Some times they made me Angry ] every single time I upload new sub website.