The fastest output from a timer is to have it toggle an output pin. On the ATmega16, Timer 2 is an 8 bit timer, and would be a good choice.
Referring to the ATmega16 datasheet:
Set the OC2 pin as an output.
Set the Timer 2 control registers to:
Set Timer2 to toggle OC2 on compare match.
Set the timer2 to CTC mode.
Set the Timer2 prescale to no prescaling.
Set the output compare register, OCR2, to 1, for maximum frequency, to see if it is equal to or greater than 1 megahertz.
Adjust the OCR2 value as needed.