Curious thing: last week I was working with another Atmega168 and, suddenly, I received the same error. I assumed that I burnt the chip and threw it away, but, considering that I get the same error weith a new and identical chip, it makes me wonder. What could be the problem?
Did you check the voltage of your power source? (Should be max 6V.)
A photo of the setup may help identify a wiring issue.