I have tested this and everything seems to be fine but can anyone confirm that the optiboot bootloader supplied with v1.0 of the ide works with the watchdog timer enabled on a mega328. Thanks.
Just found on the google code optiboot website
Adaboot performance improvements. Optiboot runs your sketches sooner, with no watchdog issues.
So I guess it is ok.
Yes, Optiboot should not have any problems with WD timeouts that occur from the sketch. In fact, they should quickly restart the sketch (skipping the bootloader.) Only an "external reset" reset cause will make the bootloader run; watchdog and poweron start the sketch immediately (Those are the "Adaboot fast start" performance improvements.)
Thanks. I have just done a 6 hour round trip to power cycle a piece of kit (not an Arduino) that was freaked out by adjacent high frequency interference. Not much fun.