This solves the problem partially.
Make the following additions in the registry and the playback is not "unrecoverable"
Go to HKEY_CURRENT_USER\Software\Microsoft\MediaPlayer\Preferences
Create a DWORD with name "MediaFolderDetectionDepth" and set its value to "0"
Create a DWORD with name "NonMediaCountToAbortMediaFolderDetection" and set its value to "0"
Now, I put in a DVD with some media files, and mp3 playback does not stop. (previously this was stopping the playback)
In case of inserting a DVD, then I had to stop the playback and press "Play Previous List" in the "Now Playing Window"
Restart is not required. (I see that WMP12 is reading the key atleast one time when the drive is inserted). May be my answer is incomplete. If so, someone please help me (I will also work on this)
I hope this was useful to some level.