Not true. Android is backward compatible. You can use the latest API available and it will still work on 1.6. You will only have problems if you use certain features only available on new API. I currently compile my apps using SDK 4.1 (platform 16),
Two things about using a later SDK:
1. By using an earlier SDK, it ensures that you will not build an app around some newer feature not supported by the older versions of Android. For example, in android.content.Context, some of the info available to API 17 are not available to API 8.
2. I am not sure of this, but if I produce an app with API 17 and upload it to the Play Store, will it be downloadable to Android devices using earlier releases of Android? Using API 8, it will be.