The custom page templates have stopped working since we upgraded to WordPress 3.4 codenamed ‘Green’. Never encounter this sort of problem with previous version of WordPress. None of the solutions found on the Internet and the suggestions found at WordPress Forumsuch as this work for us.

The solution as posted by troyster found on WordPress Forum

And we’ve found more suggestions –  here, here to solve the problem, but to no avail. Can’t complaint much as many other also facing the same problem and  the list of complaining is expanding – you can Google it.

Updated – Finally we’ve found the solution to this problem. It’s almost similar to solutions found on the WordPress Forum but with a little additional tricks. I deleted the entire folder containing the old theme. Search for a theme that contains custom page templates – for example free ‘my-life’ theme. Activate it. After that re-upload your old theme but make sure your custom page templates structure look exactly like the above screenshot. Re-activate the theme again and the custom page templates should work properly.