I am using 16 GB 2G phone brought from US in Feb2008, jailbroken first with ziphone whereby bootloader was downgraded to 3.9; then restored and again jailbroken with iplus. Thereafter I Upgraded to firmware version 2.2.1 (5H11) a few months back. Now I am facing problem with SMS programme and want to upgrade to 3.1.2 version.

I read this forum and also iClarified - iPhone - How to Unlock/Jailbreak Your iPhone 2G on OS 3.1.2 Using RedSn0w (Windows), downloaded files but when I try to restore from iTunes using version 9.0.2.25, I get a message "iphone ___ could not be restored because the firmware file is not compatible.

I am currently having 2.2.1 (5H11) firmware though my phone is 2G. I checked on iclarified different versions of firmware and noted with surprise that there were two versions of 2.2.1 but I am using one for 3G though my phone is 2G. (Surprised how 3 G version of firmware working on 2G hardware or how my iphone is showing 5H11 instead of 5H1)) Two versions stated there are as follows :
2.2.1 (2G): iPhone1,1_2.2.1_5H1_Restore.ipsw
2.2.1 (3G): iPhone1,2_2.2.1_5H11_Restore.ipsw

A. Now that I am getting non-compatible firmware message with iphone1,1,3.1.2, should I try iphone 1,2,3.1.2 or should I try 3.0.1 version as follows :
3.1.2 (2G): iPhone1,1_3.1.2_7D11_Restore.ipsw (message non-compatible)
Should I try 3.0.1 (2G): iPhone1,1_3.0.1_7A400_Restore.ipsw OR
3.1.2 (3G): iPhone1,2_3.1.2_7D11_Restore.ipsw.

B. Whether I can use the Redsn0w version 0.9.2 for unlocking / jailbreak with 3.0.1 firmware.

C. What can be the reason for iTunes not finding 3.1.2 compatible with my iphone?

The iClarified page is incorrect.

5H11 is the version for both 2G and 3G

Post a iPhone restore log and we can see why it was rejected.

Originally Posted by goyalvimal

A. Now that I am getting non-compatible firmware message with iphone1,1,3.1.2, should I try iphone 1,2,3.1.2 or should I try 3.0.1 version as follows :
3.1.2 (2G): iPhone1,1_3.1.2_7D11_Restore.ipsw (message non-compatible)
Should I try 3.0.1 (2G): iPhone1,1_3.0.1_7A400_Restore.ipsw OR
3.1.2 (3G): iPhone1,2_3.1.2_7D11_Restore.ipsw.

- the iPhone1,1 is always the firmware for 2G iphone
- the iPhone1,2 is always the firmware for 3G iphone
- the iPhone2,1 is always the firmware for 3GS iphone

B. Whether I can use the Redsn0w version 0.9.2 for unlocking / jailbreak with 3.0.1 firmware.

Yes but when you run redsn0w, point it to firmware 3.0 and not 3.0.1

C. What can be the reason for iTunes not finding 3.1.2 compatible with my iphone?

Because you are using the wrong firmware. you need to use iPhone1,1