I used an ADC MCP3204 and connected the resulting 12 bit digital output to the Arduino Diecimila. Since the Diecimila is using an ATmega168 MCU which is an 8-bit mcu, does that mean my 12 bit input will be truncated to an 8-bit data? OR does the 8-bit only means the logic tree of the mcu is 8-bit?
Your 12 bit A/D uses SPI communications, meaning the A/D digital value is shifted into the processor one bit at a time through a digital pin. The SPI software routine would would then be responsible for placing the value into a 16 bit integer variable.
When programming in a higher level language, like C, the data width of the underlining hardware processor is mostly transparent to the program.