I searched all around to find this solution. In Magento Commerce, there is no provision for manually changing order status from the admin panel. I have also try to change in Magento\app\code\core\Mage\Sales\etc\config.xml file but i cant change in magento1.6. so finally i got below solution i hope this work for you.
Open file app\design\adminhtml\default\default\template\sales\order\view\history.phtml in this file.
Also replace the code.
<?php foreach ($this->getStatuses() as $_code=>$_label): ?> <?php endforeach; ?>
<?php $selected = ""; foreach (Mage::getSingleton('sales/order_config')->getStatuses() as $_code=>$_label): if($_code==$this->getOrder()->getStatus()) $selected = 'selected="selected"'; echo ""; endforeach;?>
Its works perfectly for me i hope its work for you.