Question

why earth acts as a huge magnet

Answer 1

This question belongs in physics, but it is due to electrical currents that exist in the mantle of the earth. The mantle of the earth is like a very viscous liquid that contains many ionized elements and metallic substances. As the liquid mantle moves this causes a current which generates a magnetic field (because an electric current produces a magnetic field).

Answer 2

There's no definitive answer to that, but the dynamo theory looks adequate: http://en.wikipedia.org/wiki/Dynamo_theory