Partitioned a new Flash-drive into two ext4 partitions. Kept some extra space of 2 MB, as directed by grub2 manual and from grub-help forum, between the MBR and the first partition. Copied the boot and the KNOPPIX folder from Knoppix image.

From a running Debian system I installed grub and tools and wrote the MBR with the code
# grub-install --root-directory=/media/sdcX /dev/sdc
(replace x with appropriate values)

This could also have been accomplished by installing grub2 for PC in Knoppix.

Used Knoppix's syslinux folder and grub.cfg file to Boot the Knoppix image .

With knoppix-data.inf file in the KNOPPIX directory to use the ext4 2nd partition as persistent drive.

Installed nvidia driver and I am now using the system from the pen-drive. Cool and smooth!

Thanks for the support. I will use the recombine script some time in future to see the effect of a customised system.

Since raiserFS is not fully supported in Linux may be the script flash-knoppix2 could be changed to install Knoppix in ext4 partition in pen drive, complete with a persistent ext4 partition?