A few AVR microcontrollers have internal on-chip temperature sensors. The sensor is a diode that produces a temperature dependent voltage. This voltage is measured with the ADC. According to Atmel the typical accuracy of temperature measurements over the full temperature range of the AVR is ±10°C but after calibration the accuracy can be ±1°C over 20°C to 55°C using one-point calibration.
The calibration can be done using one-point calibration and compensation or two-point calibration and compensation. One-point calibration is the easiest - subtract the ambient