if you are going to use set item permissions action they generally don't work with the list settings for permissions as you have described above.  I would take these list settings out and do your permissions entirely in the workflow.

hi Cassy,

based on your suggestion, what permission should I set in list settings ?

thanks

I would have it inherit normally.  and deal with each item in the list with the workflow.

I had seen a similar problem, i.e. there was a conflict between List permissions and Workflow permissions. Finally we got to a conclusion that the list permission overrides workflow settings.

just the same topic was discussed a month ago here item-level permissions conflicting with workflow 

in general, list settings overrule any permissions.

so with 'Read items that were created by the user' nobody except of item creator is able to respond to task.

Hi All,

I got the solution for this.

in list setting, I will set the permission to enable all access & edit.

and in the workflow, I use "Set Item Permission" to remove the parent permission of that particular item, and reassign to appropriate permission to the respective user (such as contribute to the requestor).

Thanks