How do I configure the attiny 85 to use internal 16MHz crystal ?
Download and install the core available from here...http://code.google.com/p/arduino-tiny/
Get it working with your processor at 1 MHz.
Select the ATtiny85 @ 16 MHz (internal PLL; 4.3 V BOD)
Execute Tools / Burn Bootloader.
By the way, can I confgure the atmega 328 to use internal 16Mhz oscillator too ?
No. As far as I know, the ATtiny85 #
is the only AVR processor that can run at 16 MHz using the internal oscillator. The ATmega328 and all other AVR processor can run up to 8 MHz using the internal oscillator.
I thought atmega 328 just can have 1MHz internal
It has an 8 MHz internal oscillator that can be configured to run at 1, 2, 4, or 8 MHz.#
And siblings: ATtiny45, ATtiny25.