need to run emulator with proxy settings , I am using the following command in command prompt to start emulator
emulator -avd AVD_for_3_7_WVGA_Nexus_One -http-p
Adding "-http-proxy none" (without quotes) in Run configuration also fixes this issue as shown in image attached. Please note this is one way of fixing this issue. Your app may not be able to connect to internet via proxy later on.