1) Advantages and disadvantages of Java SDK and Widget SDK?
Widget SDK pros: Reasonably easy to create compelling UIs and user experiences. The Javascript support is pretty reasonable as is CSS and HTML. It will be very familiar.
Java SDK pros: No much, its pretty barebones from a UI perspective. It is best if you are doing data or network intensive tasks. That said, using Javascript extensions in the Widget SDK you can easily access custom Java routines from within Javascript so you don't need to give this up in the Widget SDK.
2) When to go for Java SDK and Widget SDK?
The UI libraries for Java on Blackberry are VERY limited. You will likely have to come up with your own UI framework because what come out of the box is terrible. Doing this is a very large investment of time but will give you total control. The Widget SDK, on the other hand, offers traditional CSS and HTML support with some decent support for Javascript. This means that creating UI's will be MUCH easier. My suggestion is to use the Widget SDK unless you need to develop a game that requires a high-framerate. If you are looking at a data-driven utility or lifestyle application, then the Widget SDK is the way to go.
3) Both Java and Widget applications require the latest blackberry OS 5.0? OR whether they are compatible with the lower versions as well?
Java is supported on older models; this has been the case for as long as I can recall; but the Widget SDK is only available on OS 5 and above. The number of OS 5 devices is a moving target. Many 4.6 devices are on the upgrade path, but as of yet are not running version 5.
4) Whatever developed with Java SDK can be done with widget SDK? similarly the vice-versa?
No, there are some types of applications that simply can't be done via Widgets. Examples are graphics intensive games that require a high frame-rate.
5) Is it possible to create the .java classes for Widget application development?
Sure, take a look at "Javascript Extensions". These provide a way to call upon Java code from within Javascript running the Widget.
6) Whether all the blackberry models supports both Java and Widget ?
No, only OS 5 and up support Widgets.
7) What are the Databases the blackberry Java and Widget supports?
If you are talking about local database then there is support for local persistence but if you are looking for SQL support then you will need to look to 3rd parties of which there are a few.