I was successful in adding picklist values through the IDE but unable to remove them directly from the metadata xml.
Is there something I'm missing or is this a known issue.
package.xml, which is what the force.com IDE uses, does not allow you to delete metadata components. The only way to delete metadata components through the metadata api is with something called destructivechanges.xml.
If you want to do this in a scriptable fashion then the force.com migration tool is your best bet but otherwise you can just delete it manually through the UI.