Permission is only granted to system app, in Manifest

MODIFY_PHONE_STATE permission is granted to system apps only.

For your information, there are 2 types of Android apps: system & user

User apps are just all your normal app installations through the Google Play Store, Amazon Appstore or sideloading. These go into the /data partition of your Android phone, which is the part of the internal memory made available for user data and apps.

System apps are basically the apps that come pre-installed with your ROM. In a standard Android user environment, the user doesn’t have write access to the /system partition and thus, installing or uninstalling system apps directly isn’t possible.

In order to install an app as a system app on your Android device, your device must either be rooted or have a custom recovery installed (or both).

That being said, that error is actually wrong because you have a valid code and compilation should work. It would be better if it gave a warning instead. In Eclipse you can easily fix it. Just go to:

Window -> Preferences -> Android -> Lint Error Checking.

Find ProtectedPermission from the list and set the severity to something other than error(info for example). This way your project will still compile.

MODIFY_PHONE_STATE is a system-only permission. System Apps are either pre-installed into a system folder or compiled by a manufacturer using their security certificate.

Hence, if you are trying to do this you are trying to use API which are no longer supported. With Android versions 2.3+ you can monitor incoming calls, but blocking is not allowed (i think from the link you posted thats what you're trying to do).

Android issues if you need to follow: Issue 15022 and Issue 14789

This error appears in SDK 19 onwards, when you change the manifest. Do Project Clean and Build. It should clear this error.