How can a star emit light if it is in Plasma state? 
*

*I understand that star is in Plasma state (all nucleus and electrons are not bound to each other and moving around freely)

*Photon is emitted when an excited electron moves back to lower orbit.

*So in a star if electrons are not in any orbit then how can photons be produced?
I am sure some of my understanding above is incorrect :) please help me understand.
 A: Emission of photons can be discrete, as in transitions from one quantized state to another, or continuous.
Continuous radiation for example is the synchrotron radiation of electrons moving in magnetic fields in accelerators.
Bremsstrahlung is when :

is electromagnetic radiation produced by the deceleration of a charged particle when deflected by another charged particle, typically an electron by an atomic nucleus. The moving particle loses kinetic energy, which is converted into a photon because energy is conserved. The term is also used to refer to the process of producing the radiation.

Both these effects exist in a plasma, atoms and electrons scattering off each other, thus charged particles braking, and photons come out. 
By the way,  similar continuous spectra happen in a gas too, which has a black body radiation of infrared, not visible to our eyes, atoms and molecules brake in the spill over electric and magnetic fields of each other when scattering and infrared photons are emitted. 
A: Your point 2 is not the whole truth: A photon can be emitted if a system falls from some excited state to a state with less energy, but the system doesn't have to consist of an electron and a nucleus.
Also nuclei can be described by a mean field model and there also exist different energy states, so photons can be emitted. This is for example what happens if we see gamma radiation.
Additionally, and I think this is the main answer to your question, during the fusion process in a star, a lot of energy is produced, also in the form of photons and neutrinos. Look for instance at this wiki article of the p-p chain:
http://en.wikipedia.org/wiki/Proton-proton_chain_reaction
 
All the gammas in this picture which shows one of the fusion processes in a star denote photon emission.
A: 
1.I understand that star is in Plasma state (all nucleus and electrons are not bound to each other and moving around freely)

While hydrogen only has one electron, all other neutral atoms have more than one electron.  When one electron is removed, this is referred to as the "first ionization".  Removing one of several electrons from an atom still makes it plasma.  Also, the term "plasma" is used when a substantial fraction of the atoms are ionized, not necessarily all.  So in the sun or other stars, there are still electrons bound to nuclei, as well as free electrons.
For these reason, in the spectrum below, one still sees lines from transtions between electron energy levels of atoms. 
 

2.Photon is emitted when an excited electron moves back to lower orbit.

Yes, and absorbed when going to a higher level, that is why we see the lines in the above spectrum.  

3.So in a star if electrons are not in any orbit then how can photons be produced?

The main reason is that gamma ray photons are produced in the core of the sun by hydrogen fusion to helium, and create a cascade of lower energy photons as they travel to the surface.  Also, all materials emit black body radiation.  The overall shape of the above spectrum fits well to a black body model.  
A: Thanks for a great question, and thanks to everyone for great answers! :-)
A very simple answer is, as someone above has already mentioned, there are lots of collisions of nuclei happening in a star. When these nuclei fuse, the binding energy is given off (this is the energy we get from fusion); and photons are also given off as the (now bound-state) compound nucleus de-excites to its ground state. These fusion-followed-by-deexcitation reactions are responsible for most of the energy and light from stars.
As we know, Electromagnetic radiation doesn't just have to come from electrons de-exciting, but comes from oscillation of any charged particles (e.g. protons inside the nucleus). 
Keep thinking! It's great to see someone question things.
