I am on L1B. I want to apply for H1B for my spouse who will be on L2 Visa.
Q1. If he gets his H1B sponsored by an employer, Will his L2 Visa still be valid?
Q2. In this case if his L2 Visa becomes invalid when he gets his H1B approved,
And later if his employer cancels his H1B or in any case if his H1 is cancelled,
At that time if my L1B is valid, then can he apply for L2 again from with in USA or he has to go back to India to apply for this?

He can file for change of status from H-1 to L-2 90 days before H-1 expires (only when your L-1 is still valid). Both are consular processed visas, so it's best to apply at the consulate. You may apply in US but if leaves the country, he has to get visa stamped in order to return anyway.