can I take the ATmega168 out of the Arduino board and use it on a breadboard or pcb ?
Yes.
But how do the Arduino i/o pins relate to the chip
http://www.arduino.cc/en/Hacking/Atmega168Hardware
can I just connect up the way I did when using the board or are there critical stuff on the arduino board which needs to be replicated.
crystal+caps, reset line pullup resistor, regulated +5V supply, .1uF cap at or near Vcc, and probably a pullup resistor for the RX data line. (I don't think I've forgotten anything.)
There's nothing magic on the Arduino board; the biggest thing is to make sure the clock source (crystal) in the target circuit matches the settings in the ATmega's fuse bits. If you include a crystal of the same speed as on the Arduino board, you've taken care of that.
Look around the Arduino site a bit, especially tutorials and the playground. You'll find examples of homegrown arduino boards, an "Arduino breadboard", etc.
-j