I am using Redhat 5. I am really confused over the existing configuration in my machine. Can anybody please let me know what's the main difference between firewall and iptable rules. If I have IPTables enabled (with masquerade) and Firewall (accessed from menu Administration menu) disabled will that cause any problem.
They're two different names for the same thing. When you use the menu-based tools, they actually change the running iptables ruleset; you should be able to see those changes immediately by doing an
Whether you're trying to alter the main table (aka filter, which does firewalling), the nat table (which does NAT), or the mangle table (which is scary, and you shouldn't do it), the tables, chains and rules manipulated by iptables are the most fundamental expression of the current firewalling situation; any GUI tool you might use is essentially layered on top of that.
The only caveat is that the current iptables situation is ephemeral, and won't survive a reboot unless the machine is set up to save the current ruleset on machine-down. GUI tools are usually more polite, and will often update the system's boot-time ruleset as well as making the change to the current ruleset.
So the short answer is that you can use either tool, depending on which seems best to you, but you need to be aware of the shortcomings of whichever method you use.