Arduino can be used for variable duty cycle square wave?

Hello,
We are doing PWM dimming of LED drivers. We need to set up an Arduino board so that the Arduino can deliver the PWM dimming signal.
The PWM dimming signal has to be a variable duty cycle square wave at any frequency between 500Hz and 30KHz.
We would like the PWM dimming duty cycles to be smoothly changeable via a pot.
We want to have good dimming resolution, so for example, with the case of a PWM dimming frequency of 500Hz (2ms period), we would like at least 200 different duty cycles (evenly spaced) to be available, from 0 percent to 100 percent duty cycle.

We don’t need the pwm dimming frequency to be smoothly variable, but just need it selectable to , say 500Hz, 1KHz, 2KHz, 3KHz….up to 30KHz.

Is it true that the arduino is not suitable for this kind of thing?

A rough search on my end seems to indicate "not quite," but it will depend on the speed of your Arduino. Functionality-wise, Arduinos have a number of DAC inputs for the pot, each with 10 bit resolution if I recall. If your timer interrupt is fast enough, you can get 1024 duty cycles. There are a number of ways to get selectable frequencies. If you want 2^N frequencies, you can easily set up N digital input pins on read attached to switches and a pullup/pulldown network. That's the easy part.

Setting up the PWM, on the other hand, is a bit trickier. Normally you'd set up a timer interrupt at your desired frequency to achieve PWM. You probably want to scour the documentation for the Arduino timer interrupts for your chip, like this page:
http://letsmakerobots.com/content/arduino-101-timers-and-interrupts

From here you should be able to set up timer interrupts any way you want. However, you can't use digitalWrite in your interrupt because it's too slow at the higher frequencies. Instead you'll have to directly tell the ports what to do, kinda like this guy:
http://billgrundmann.wordpress.com/2009/03/03/to-use-or-not-use-writedigital/

He seems to be getting about 2 MHz out of his system. If you wanted 200 different duty cycles for your 30 kHz system, you'd need to be able to toggle your LED at 6 MHz to get your 7.6 bit accuracy.

tl;dr: I think an arduino is too slow to handle ~8 bits of PWM accuracy at 30 kHz

The easy solution is that you can divide the ADC combinations to 200. (1024/200). So, by each 1024/200, you can increase duty cycle by 1%. It is simple way to do. For PWM Frequency, you may use two push buttons. (one for increasing Frequency and one for decreasing frequency).
For more information about duty cycle, see here.Motor Speed Control Using Arduino