Hi Sarath :)
One of the easiest ways to make a bootable pen drive is simply to copy an image of a bootable drive sector-by-sector to the USB drive. When the whole drive is copied this way, every aspect of that drive, including its size, is copied: so, if you put an image of a 2GB drive on an 8GB drive, the operating system sees a 2GB drive, because that's what its partition table reports. It's likely that this is what's happened to yours. There are ways of creating bootable drives that store the bootable operating system on one partition and leave others available (in the drive's remaining free space) for reading and writing...but since they're a bit more complex to set up, Live USB installers often take the simpler route and just convert the whole pen drive, losing any free space in the process.
Assuming you're working in Linux, find out which drive (e.g. sdb, sdc, sdd or whatever) your pendrive is, and then use the command cfdisk (as root) to repartition it (fdisk is more powerful, but cfdisk is easier to use, so start with that). If you don't know how to look through fstab or the output of the mount command (or use your GUI file browser or whatever) to find your pen drive's name, just run "cfdisk /dev/sdb" and then "cfdisk /dev/sdc" and so on until it's obvious (from the size of the partition, and/or the label and so on) that you're looking at your pen drive (and do make VERY sure, because you're about to wipe it completely and irreversibly, so don't be accidentally doing this to a hard disk!).
Once in cfdisk, delete all the partitions and create a single new partition, giving it type 0B (zero B) if you want to format it as a FAT32 partition (usable in all Windows and Linux computers) or 83 if you want to format it as an ext2/3/4 partition for Linux. Write the changes to disk.
To format the drive, (again, as root) type mkfs.vfat /dev/sdx1 (where x is the correct letter for your pen drive) for FAT32 or mkfs.ext4 /dev/sdx1 for ext4. If you don't have the mkfs.vfat symlink you can type mkdosfs -F 32 /dev/sdx1 and it does the same thing. Read the man pages re labels and other options.
Of course, all this can be done with a few mouse clicks using GUI tools, too, depending on your OS and desktop. So long as you reformat the whole drive (i.e. repartition it and then format it, rather than just formatting the existing 2.9GB partition) you'll have all its space available again.
:)