I use the following fuse settings:
EXTENDED 0xFF
HIGH 0xD9
LOW 0x62
I then use the "Lillypad Arduino w/ATmega 328" board option fro programming.
To get the delay() timing right, I modified the Boards.txt file for this option so that the entry lilypad328.build.f_cpu=1000000L
This is for an Atmega using the internal oscillator at 8 Mhz divided down to 1 Mhz by the prescaler of 8.
There is no bootloader and sketches need to be programmed with ISP programmer.