You can get PWM frequencies much faster than 490 Hz. Look at the ATmega168 datasheet or search this forum for posts I've made about generating PWMs with arbitrary frequencies (searching for posts by bens containing "PWM frequency" should probably bring them up).
As far as what you're planning on doing, I'm not sure how you expect to get a PWM pin to output a negative voltage. I assume your plan is to use MOSFETs or transistors to deliver the current to the motor (since the mega168 most likely cannot deliver what will be needed), and I guess you will be using a negative regulator to generate the negative half of the sine wave?
Yes the plan would be to use the arduino to handle the switching and use transistors to handle the actual current. I am very novice with this so the plan was to try it out on a small 12V AC motor first so that I don't kill myself playing with the full 120V outlets.