Thanks all of you. Both the job are not contract position. I Salute all of your for your suggestion. With the help of you guys and my other freind  Raj, i prepared the following letter for my first employer. Hope it works.

Dear  xyz,

Thank you very much for your help and letter offering me the position of Software Engineer with  your company. While I believe firmly in the mission of your organization and appreciate the challenging opportunity you offer, I have had another offer which I believe more closely matches my current career goals and interests. 
Therefore, although it was a difficult decision, I must decline your offer. I do appreciate all the courtesy and hospitality extended to me by your office, and I wish you well in your endeavors.

If I can be of any assistance, please let me know.I would be glad to help however I can.

I wish you a happy new year.