How to show cutom post labels in options?

You just need to pull the Labels via get_post_type_object();

<?php 
$args=array(
  'public'   => true,
  '_builtin' => false
); 
$output="names";
$operator="and";
$post_types=get_post_types($args,$output,$operator); 
?>
<select id="" name="">

    <?php foreach ($post_types as $post_type ) {      
        $label_obj = get_post_type_object($post_type); 
        $labels = $label_obj->labels->name;
    ?>

        <option <?php selected( $instance['posttype'], $post_type ); ?> value="<?php echo $post_type; ?>"><?php echo $labels; ?></option>

    <?php } ?>

</select>

Read more here: http://codex.wordpress.org/Function_Reference/get_post_type_object