How do i create administrator that able to manage users but unable to access users files ? (win2008)

There are limitations for customization . ... In real cases it is not possible but it depends the environment.

Is this domain administrator ? Which files/folders should be blocked for the particular user ?

In permisions the most restrictive is applied.
You could place a user in the administrators or domain administrators group that would allow them to create and manage users.
Then configure their user to be denied access to a set of user files.

Even though as the administrator they would have access to the files, the deny permission would be applied keeping them out.

Well, you can put them into the Account Operators group, which is a much better idea than making them a domain admin because a domain admin would be able to change the NTFS permissions on a server.
http://technet.microsoft.com/en-us/library/cc756898(WS.10).aspx

If the Account Operators have too much power, you can delegate permissions in AD at a very granular level.
http://www.tech-faq.com/how-to-delegate-administrator-privileges-in-active-directory.html

@afthab
Particularly, i don't want the aid administrator gain access to users profile. e.g. c:\users\<username>\

@austincomputerlabs
i tried, it works but he can forcefully take ownership. now, how do i prevent this account (which is in administrators group) from taking ownership.

@kevinhsieh
the server is a TS server not connected to AD. but i'll try anyway, i'll post result

Yeah, i guess there is no around it. Moving it to domain is the way to go.