Water conductivity measurement AC, interfacing with arduino

Also consider using a capacitive sensor.

If you glue two plates side-by-side on the outside of the tank, they will act as a capacitor with the water (or air) in the tank as the dielectric. Because water has a dielectric constant that is 100x that of air, you can easily and accurately relate the capacity of the plates to the water level in the tank.

See Measuring Water Level Without Getting Wet for more information.

Interrupts are your friend for timing sensitive tasks, but only if you put the timing critical aspects into the interrupt, and there are no other interrupts happening that have a higher priority. The microcontrollers on the "AVR-based" Arduino (e.g. the ATmega328P) have fixed interrupt priorities as detailed on page 58ff of the datasheet. So if you used TIMER2 COMPA as your critical timing interrupt and no other interrupts you should be OK (as it has the highest priority). If you also want to use lower priority interrupts, you need to make sure that all of them re-enable global interrupts when entering their interrupt service routine:

When an interrupt occurs, the Global Interrupt Enable I-bit is cleared and all interrupts are disabled. The user software can write logic one to the I-bit to enable nested interrupts. All enabled interrupts can then interrupt the current interrupt routine.

(p. 14 of the datasheet)

This is slightly different on ARM based Arduinos as their Cortex-M3 core has a "Nested Vector Interrupt Controller", where the priorities aren't fixed (can be set in software), and nested interrupt handling is the norm. So for timing critical applications, the ARM based Arduino would give you more flexibility. However, I don't think that's really necessary for your application.

The bigger question is really how easy these things can be implemented with the Arduino libraries. To get the best performance you will probably have to code outside the libraries to some degree, at least for the timing critical bits, i.e. avoid things like delay() or millis() altogether.

Whether or not you need to split depends on how much processing you intend to do. Again, going outside the libraries can potentially give you better performance.