I was able to resolve my issue and connect to DataPower (IBM Xi50) Web Service Gateway using the following WCF CustomBinding (CertificateOverTransport) and CustomCredentials (UsernameToken with Password Digest, client cert for transport authentication and service cert for message body signature.) I am not sure what exactly fixed the issue, but here is my working WCF code! I hope this helps others who are in a similar situation as I was.
I went through your code and it looks correct. There is small difference in WSE and WCF soap message but the difference is only in the way how the certificate used to sign the message is referenced.
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