I'm building my first standalone arduino project (atmega328 on stripboard). I power it through a 7805 regulator which has 10uF caps on input and output. The 7805 is on a separate circuit board. The wire from the 7805 to atmega328's VCC is about 20 cm (ten inches) long, quite thick (0.75mm2) wire, plus about ten cm on the stripboard.
Should I place an additional cap between atmega328's VCC and GND (and AVCC and GND) close to the pins? And what would be a proper size for the cap?
Should I place an additional cap between atmega328's VCC and GND (and AVCC and GND)
Yes.
0.1uF
OK, thanks Mike. Does it have to be elco or will ceramic do?
pekkaa:
OK, thanks Mike. Does it have to be elco or will ceramic do?
Actually ceramics are preferred.
It wouldn't matter where the regulator and its electrolytics were, that 0.1uF cap is required always, right next to the chip. Decoupling capacitors should have low ESR and ESL, which in practice means ceramic, right next to the relevant pins. The exact value isn't too important,
BTW, so anything from 0.1uF to 1uF will work fine.
I have a strip of 0805 0.1uF caps on hand. They can be soldered between the VCC/GND and AREF/GND pins on the bottom of the 328 chip. Quite handy and not at all hard to do.
MarkT:
BTW, so anything from 0.1uF to 1uF will work fine.
1uF ceramics are quite big... 
Thank you all for thorough explanations. I'll use 0.1 uF ceramics then.
1uF ceramics are quite big
Not anymore. You can get 10uF in 0805...
0805 is so yesterday.
Here's a 10uF cap in 0402: