The Arduino is used as much in musical projects as any other art or games projects. Being able to create your own interfaces is something many musicians do to create interesting control over the sound. The Guitarduino is one such example.
Using 6 arcade-style buttons, 3 force sensitive resistors and a long FSR strip, Igor Stolarsky can play drums, loops and manipulate effects in real-time. The Arduino spits out ASCII serial data, which is picked up in Max/MSP. This is then sent to Ableton Live (or AxeFX II, a guitar FX preamp) as MIDI.
The Guitarduino is a pretty damn cool project, and can be used for some excellent live performances. Here's an overview of how it all works...
And a demo song