The AVR on the arduino should be able to do reasonably good audio quality, but the big problem is going to be the amount of ram for your delay buffer. The AVR only has 1k, and at a reasonable-quality sample frequency (20000Hz?) that means a max of 1/20 second or so, even if you could use all the ram for the delay buffer (and you can't.) You could add an external delay buffer of some sort, but then you could just purchase something more special-purpose and be done with it...