The analog signal to the arduino input is not stable at all.
I assume you mean the Arduino's readings are not stable. If the source of the signal is not stable an Arduino cannot change it.
Do you have any idea to make it stable?
Do multiple readings and average them, be sure to use datatypes that can hold the sum. Also an often used practice is to do 2 measurements an ignore the first...
I tried Analog input smoothing with average value.. But...it is not working...
What readings are you getting from the analog to digital converter?
how did you connect the AD? What voltage reference are you using? How are you powering your board? What board is it?
A rotary encoder can work to create a kind of potmeter to be fed into a circular bargraph, although it will take a bit more than a potmeter and also won't have a reference value to start with.
Can you show us a wiring drawing of how you are attaching the pot to power, ground and the arduino pin?
One can expect a count value of +/- minus a few counts, so what variation are you seeing?