I am not able to create a new Dynamic Web Project in eclipse indigo. I am getting the following error while creating new one.
Dynamic Web Module 3.0 r
Most probably you have several installed java versions on your PC, and your Eclipse is started based on old version.
In command line java -version command shows default one or even first installed one, which is saved somewhere in registers, and it is not always that which is used by your applications. (As example, I have only 1.7 installed physically now but java -version shows old one 1.5)
You may try next: right click on Eclipse shortcut, chose Shortcut tab, and change Target field so that it run with -vm argument pointing on that Java version you need:
"D:\eclipse-jee-kepler-R-win32-x86_64\eclipse\eclipse.exe" -vm "C:\Program Files\Java\jdk1.7.0_45\bin\javaw.exe"