Capacitor Touch switch with QTouch

I suspect the problem is not with your C code but with your Makefile.

The following lines in your Makefile produce an example.o object file.

main:
    avr-gcc -g -Os -Wall -mmcu=atmega328 -c ../src/example.c

The created .o file only contains the symbols and code from example.c, not the additional source required to actually make it run on a target system such as interrupt vector jump tables and code to initialise the BSS RAM segment to zeros, and load your initialised data sections.

You'll need to add an additional line something like this to run the linker and produce an output object suitable for download to the AVR part. Alternatively, use avr-ld, but you'll have to work out all the required linker options.

main.elf: example.o
    avr-gcc example.o -o main.elf

You can use avr-objdump --disassemble-all <filename> on both example.o and main.elf yourself to verify the different content of each file.

It's always a good idea to try to reduce your problem in steps to the most simple example possible. In this case, it would probably mean dropping into the AVR Studio software and creating a project running on the simulator using their managed build process. From there, you could them export the Makefile in use by their build process by using the 'Export Makefile' menu option. The generated makefile could then be compared with your version.

Actually, it's probably a good idea to use a Makefile similar to the one generated by AVR Studio because it has the correct rules already defined, you just have to set up some variables with regard to which objects need to be generated and the final target file name.

Hi Z stands for "seemingly almost nothing connected", it acts as an open circuit, so you should take care of that situation if you want the other circuit to function properly.

Also, by the looks of it, 4.7k seems to be right in this scenario, as it would mean ~1mA at 5V, which is usually tolerable by most of the devices.

You should take a look at the uC datasheet on what resistance it uses for pulling down, and probably just set the port to pull down and the direction to input, but that might depend on what output impedance the touch module provides...

Copied form my comment below

According to the doc In stand-by mode one of the lines are connected to a level triggered interrupt in order to detect touch activity

It seems it stands for interrupt - if the device is touched, and goes out of standby, it pulls the line low to make the uC aware that it is touched. The uC has to switch mode of that pin to ADC at that time, and then it can detect the coordinate.