premal:

You're trying to write the results to the same file you're reading from. Instead, read from one file and write your results to a new file, like so:

my $file1 = "C:\\temp\\file1.txt";
my $file2 = "C:\\temp\\file2.bat";
my $file3 = "C:\\temp\\file3.txt";

open (FILE1,"$file1");
open (FILE2,"$file2");
open (FILE3,">$file3");

my @file1 = <FILE1>;
my @file2 = <FILE2>;

close (FILE1);
close (FILE2);

chomp @file1;

foreach (@file2)
{
    foreach my $search_string (@file1)
    {
        s/$search_string/"******"/g;
    }
    print FILE3;
}
close (FILE3);
[download]

That should solve immediate problem. Note: I haven't tested or run the updated version.

Update: Tweaked per jethro's comments. (I really ought to not code until I finish my coffee... ;^D)

Update 2: To avoid further embarrassment, I tested it and updated again. It passes my tests now.

...roboticus

When your only tool is a hammer, all problems look like your thumb.