Will android market work (update app) after I install a new mod in my phone I am going to root and install cyanogen mod 7 on my samsung I5801 (Having froyo).

Will the android market work in cyanogen mod i.e. will I be able to use and update all the applications (whenever updates are released) that I installed from android market as I would do previously?
CyanogenMod is not permitted to redistribute Google's proprietary apps packaged with the ROM, but they make them available separately. As long as you download and flash the latest Google Apps package from your recovery system, you can continue to use the Market as you normally would.

The newest versions of CM are (according to the wiki, anyway) designed to actually backup your Google Apps during the install and then re-install them for you, but I've had mixed results with this so I typically just install them manually after installing CM.