ok, many questions... I will try and do as many as I can see, please say if I leave any out.
How can they run multiple OS's at the same time?
Virtualisation software basically runs a physical computer as software inside of your computer and emulates a real computer. This has many benefits, the main one being portability. I have VMware Workstation on my desktop and laptop - I can feely move a virtual machine between the two machines - simply by pausing, moving the folder then resuming.
What kind of mechanism do they follow to allow efficient switching between different Guest OS or between Guest OS and Host OS ?
A bit confused here - basically, a virtual machine runs as a program inside your machine.
How much difference would be there between the actual OS and a OS running as a guest OS on a virtual machine ?
Unless you are doing anything that relies on specific CPU instructions or a feature that isn't emulated, there isn't much difference. The main one though has to be graphics, the latest virtualisation software does a good job, but it is still not perfect compared with native hardware.
If there is substantial difference in performance, how can it be avoided ?
If you have antivirus, you can exclude the working directories of your virtual machines, and increase the priority of the process on the host, apart form this - there isn't a lot, but if you are running a lot of intensive programs on the host, it may take priority and slow down any guest. Loading a virtual hard drive on its own hard drive (physical, not partition) and lots of memory are your friend!
Is there a possibility of that Guest OS getting affected by virus from the host OS or vice-versa ?
Yes, but it is unlikely. You have to treat any virtual machine that is on your network as a physical machine - if it has a virus that can be spread over the network, it will act just like any other machine. Disabling networking, host interactions (such as shared folders) should make this almost a non-issue, but just don't be silly.
Can i use the anti-virus of the host OS to scan the guest OS or is it feasible to scan a host OS from an anti-virus software in guest OS ?
You can mount some virtual hard drives to the local filing system, then scan for viruses, but I wouldn't recommend - If you are worried about malware, install an AV scanner inside the VM.
If i have an internet connection, can i browse by switching between Guest OS and Host OS ?
You should be able to use the internet connection from both at the same time.
If the guest OS crashes, is it possible for any kind of recovery from Host OS ? Any ideas ?
Yes, you should be able to take snapshots at points in time and easily go back to them. But, you have to treat any guest OS as a real computer.