Even famous sites like Twitter are suffering from XSS vulnerability, what should we do to prevent this kind of attack?
The #1 Thing you can do is set your cookies to HTTP Only ... which at least protects against session cookie hijacking. Like someone stealing your cookie when you are likely admin of your own site.
The rest comes down to validating all user input.
Very lengthy subject discussed in detail here:
http://www.owasp.org/index.php/XSS_(Cross_Site_Scripting)_Prevention_Cheat_Sheet
http://www.owasp.org/index.php/Cross_site_scripting
XSS is only one of many exploits and every web dev should learn the top 10 OWASP by heart imho
http://www.owasp.org/index.php/Top_10_2007