Silverlight was working great and one day I started getting this error on debugging:

Unable to start debugging. The Silverlight managed debugging package isn't installed.

Many web search links talk about solutions for beta 2 which is irrelevant here. Fortunately, some links pointed out that "uninstalling Silverlight Tools completely and reinstalling it" solves it. Sure, I did it and it worked.

Aparantly, I had reinstalled silverlight, and I had to do the above setup also for resolution. So unintuitve...