I don't know much about Atmel products, but at first glance it looks like the attiny26 would suffice. I see, however, that Atmel lists the attiny26 as "Not recommended for new designs."
Use eight input pins with eight push buttons to give yourself an 8-bit (256 different notes) input. Other than the mcu and a speaker, you'll need some sort of air pressure sensor if you're thinking a recorder-like breath controller. I've seem some surplus at Electronics Goldmine, but I don't know enough about what they have available to say that it would be good for the purpose. The cheapest alternative to that I can think of would be to modify one of Yamaha's breath controllers. The attiny26 has ample A/D input capabilities for reading an air pressure sensor.
Did you already have some sort of breath control/tone production in mind? I imagine, like PICs, the attiny26 might be capable of sound synthesis, but perhaps some other electronic means of tone production might be in order (i.e. that can be more accurately tuned)?