The mobo isn't reading your CPU wrong. But that's besides the point. The simplest explanation is that one of your sticks of RAM does not like running at 166mhz. You haven't given us info abou the RAM (speed and timings) so this is an uneducated guess.
The first thing you should try is removing all of the RAM except for a single stick. Set the FSB to the desired 166mhz. Set the RAM timings to a relaxed setting (usually 2.5-3-3). Then boot into Memtest86 and let it run for a while. If that stick passes, replace it with another one, and so on, until you've: a) verfied that all of the sticks work fine individually, b) verify that one or more of the sticks produces memory errors at 166mhz.
Report back what you find.