1. I want to use LPC Universal Sprite in my game development, is this allowed? Yes. Credit all contributors & share derivatives under the same license and you're all good. :)
2. What if I use the LPC Universal Sprite as a reference to create my own 2D sprites, it may look a little similar but I would modify it and add extra things to it, what will it mean then? your own 2D sprites will be derivatives. Will it still belong to them or be counted as a new artwork? It will belong to both the original artists and all subsequent contributors, including yourself. It won't be "new" artwork, it will be "derivative" artwork.
3. If it is allowed to be used, I read that I have to make my whole game project as open source work that anyone can access? Not really. Only artwork derived from LPC art is subject to the Share Alike clause.  Does it mean just the artwork stuff I changed/used or even things that don't even belong to them like scripts, etc. Generally, only ARTWORK you've made with the LPC art would be derivative of it. How would you even derive scripts from graphical artwork? If you took an LPC sprite, made it into a different sprite, that new sprite would need to be released under the same license as the original (be sure to give credit in your game to all the artists that made the original sprite. You can credit yourself as well, since you also contributed to the new sprite.) 

MedicineStorm is correct; this is addressed on the site FAQ as well https://opengameart.org/content/faq#q-proprietary .