In the lookup layout only recently viewed records are showing up, though all the other items are accessible to the user. Where to change the setting for the same, in order to display all the records instead of recently viewed records? Please advise
That is the default behavior I believe. It shows recent records. However if you search, the records matching criteria will be shown.
That justifies the behavior as lookup is just like searching and selecting. I shows recent records because you might be interested in them that why you viewed them recently.