I have configurable products in my site but I am having confusion in properties of simple products like status set to what and also visibility. Also Auto generated Xml sitemap contains simple products URls should I keep those URls in sitemap?
You should keep you product URLs in the site map as they are links to actual pages, which is what the site map is meant to provide.
The customer visibility of a product depends on whether it is set to disabled and placed in category. If either of those things are not true (not in a category or set to disabled) a product won't appear on your customer facing pages.
You can also use the visibility drop down to select whether a product is hidden, can only be searched for, only appears in the catalog (but can't be searched) or both. Generally you would leave the visibility as 'catalog, search' and use the enabled status to show/hide a product. Well, I find that easier to manage at least.
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If the products still exist then you can definitely have them in the XML sitemap. Else if you update the products regularly you can go with the auto sitemap generations quite often and update them in your website.