Hi all,
Just to let those who encounter this problem know I’ve sort of solved the problem. I traced the problem and realized that the problem comes from the hashing code of wp-hash-password function. With my limited knowledge, I don’t really know what activity is going on in the hashing function but I know ultimately it does not return me a MD5 hashed password. I opened a fresh copy of the file and realize that it is identical to the one I had so I’m guessing the file has not been compromised; the problem should lie with some configuration thingy.
Instead of trying to find the problem with my limited knowledge, I just went ahead to comment the hashing algorithm and added in my own md5($password) and have the function return this instead. After that everything worked fine. I know it is not advisable to do hacks on the core file but since there’s not help anywhere I just did it my way.