My site is having dynamic pages which are being changed (removed/added) on daily basis depending upon the clients records. Do i need to update sitemap on daily basis to have only updated pages and remove the links which don't exist today and might be back again tomorrow.
Google won't send traffic to pages that disappear and re-appear regularly. The webmaster guidelines state that they only consider stable sites that are live 24 hours a day. If these pages are that much in flux, maybe you shouldn't be trying to drive search engine traffic to them at all.
The sitemap feed is a tool for you to use to tell google what is new and what has changed. If you want these pages to be indexed and you want Google to see what is fresh, then recreate the feed frequently and use it to actually tell Google about these changes, it will save googlebot time and effort. I don't think there is any requirement that you do so. I wouldn't expect that leaving a slightly stale feed in place for a week would hurt.