Vinod, the account used to access the file system is System.Security.Principal.WindowsIdentity.GetCurrent(), check this.
If you see ASPNET then you are not impersonated.
<identity impersonate="true"/>
Has no effect because by default the WCF service don't use the pipeline of ASP.NET (so you don't have access to HttpContext). If it's not what you want turn on the aspnet compatibility as described here.
ASP.NET impersonation: By default, WCF
requests always runs as the IIS
process identity, even if ASP.NET is
set to enable impersonation using
System.Web’s configuration
option.
Solution :
<system.serviceModel>
<serviceHostingEnvironment aspNetCompatibilityEnabled=”true” />
</system.serviceModel>
There is another way to impersonate the user (Better because it doesn't depend on ASP.NET so no surprise if you decide to use a windows service instead of ASP.NET, but I have not tested), take a look here.