Adressing for Microchip 24LC1026 and other Microchip 128kB EEPROMS are different. Addressing of 24LC1026 is similar to that of Atmel 128kB EEPROMs. If you choose the setting as for other 128kB Microchip EEPROMs,like Microchip 24LC1025, booting from 24LC1026 was seen to fail if the image size > 64kB.
So, as in the App note 'FX3 I2C Boot Options' (http://www.cypress.com/?rID=52340), in the bootimage format choose the setting for Atmel 128kB EEPROM. i.e. in the byte 'bImageCtl', set Bit3:1 (I2C size) as '6' corresponding to Atmel 128kB EEPROM.
This solved the issue. With this boot image format, we are able to program and boot from 24LC1026 successfully.