To generate 2 different frequencies you have to use 2 Timers of an AVR Controller.
The Output is an rectangular signal that will have many harmonic frequencies.
For an DTMF code i would never use such one, ore you spend a Filter after the Output of the PWM Source.
I think the better way is to use an DTMF Chip that will be steered from the AVR.
Probably such one like the MT8880 from MITEL.