I set custom configuration in APP.config.
When I convert the application to DLL and use in within another application, the dll in not running because it can not access to my custom config. Instead it tries to search in new application APP.config.
You cannot access the app.config (or the actualy properly named assemblyname.exe.config/assemblyname.dll.config) from a DLL. A DLL does not read a configuration file and thus doesn't provide the respective mechanisms.
The only way to use the .NET configuation mechanisms from a DLL is to copy the relevant configuration sections to the executing application's configuation file.
The application will then read the configuration and the DLL will be provided with the current values. I've done this several times successfully.