if i put <nhibernate> in app.config , it works fine

Once I separate into hibernate.cfg.xml, (embedded resourse)
it is not working

from the log file , i can see this error
Could not configure datastore from input stream
NHibernate.HibernateException: The dialect was not set. Set the property hibernate.dialect.
at NHibernate.Dialect.Dialect.GetDialect()
at NHibernate.Dialect.Dialect.GetDialect(IDictionary props)
at NHibernate.Cfg.Configuration.AddValidatedDocument(XmlDocument doc)
at NHibernate.Cfg.Configuration.AddXmlReader(XmlTextReader hbmReader)
at NHibernate.Cfg.Configuration.AddInputStream(Stream xmlInputStream)

Do I need any setting in app.config ?

You need to call Configure(). Settings from app.config are picked up automatically, settings from *.cfg.xml are not.

I dunno why it complaint resource file is missing

I got "digi.hbm.xml" in embedded resource.

<hibernate-configuration xmlns="urn:nhibernate-configuration-2.0">
....
<mapping resource="digi.hbm.xml" assembly="digi" />
</hibernate-configuration>

However it works fine once I remove <mapping resource../>