Solution for Error: The inventory quantity to match for packing slip xyz item 123 cannot be reserved.

Solution concluded from below two postings:

1: http://community.dynamics.com/product/ax/f/33/t/27545.aspx
2: http://dynamicsuser.net/forums/p/45819/231704.aspx

First check packingslip number from purchase order. Then goto AOT--> Data Dictionary-->Tables-->Purchparmsubline TABLE.

Search packingslip number in DocumentID field delete it.

Worked for me :).