I have image file stored in my episerver website Admin mode > File Management. But when I try to open the images eror 404 come that page doesnot exist.
If i view the thumnails of the image still the images are not showing up.
I'm not sure but maybe you don't have the staticfile module registered?
I think this link will give you the information you need for enabling wildcard mapping: http://learn.iis.net/page.aspx/121/iis-7-modules-overview/
Also make sure you have configured a location for the the VPP folder (~/documents/ must have a corresponding <location path="documents">)
What IIS version are you running on?