How is the PN junction formed?
Why is the positive charge not distributed in the entire N type region (as there are free electrons for conduction in the N type region)?

It actually is. The diagrams are shown that way because we're primarily interested in the electric field produced by that charge, which is strongest near the junction, since that's where it's nearest the corresponding negative charge.

Why are the charges fixed at junction despite the presence of holes and free electrons?

Once the diffusion has stabilized, there are no free carriers in the central region, which becomes insulating. This insulating barrier becomes the dielectric between the two conductive regions, effectively forming a capacitor.