@Baskers Yes, that’s incredible, this has also fixed the same issue I was having. I’d never have thought the directory name would be a factor. Glad you’re all sorted!
I have been having the exact same issue. Clean install of both WordPress 3.5.1 and BuddyPress 1.7. Presuming you have checked the box “anyone can register” in Settings > General it’s a mystery.
I did consider it might be a permalink issue, but have tried all combinations thereof. No joy. You might however want to try this perhaps. Also, it’s worth checking which pages are assigned to your registration and activation in BuddyPress settings.
There are various threads on the same topic in this support forum, everybody experiencing exactly what you have mentioned, but none of them are resolved (so far as I can tell).
Leads me to think that this is a SERIOUS bug in an otherwise fantastic plugin. It’d be nice for some of clarification on this though, even if the answer is ‘it’s a bug’.