AC current measurement with ATmega328
simulate this circuit &ndash; Schematic created using CircuitLab

Figure 1. Rearranged version of the OP's circuit.

Rather than add a DC blocking capacitor a better way is to reference the CT at half-supply and then you can take analog measurements from the other end of the CT which will alternate above and below half-supply.

This solution gives you a minor problem that you need to figure out where your analog value is for AC 0 A and this may not be possible if there is already current flowing when your micro is powered up. The solution is easy: use a second AIN to monitor the reference voltage. You need to wait on power-up until the voltage is stable (and your R2 and R3 values might be a bit high) and then sample it occasionally to catch any drift.

Depending on the overloads you think you need to handle, a simple series resistor will limit the current to a safe level for the input protection diodes to handle. I'm not familiar with the chip so you need to confirm this. Alternately a pair of diodes the the supply rails would probably suffice.