Is a 1966 mustang with a 289 v8 considered a muscle car?
No, the mustang for the most part is NOT a muscle car, it's PONY CAR!
(Where do you think they got the term from?)
If you want a mustang that actually fits the "muscle car" criteria you need a shelby or a boss 302/429 CJ or something w/ A LOT MORE POWER.
But your car isn't one since the 289 was the base V8 as far as 60's mustangs go, though it was the only one offered in 66, the max it put out was about 271 HP. The mustang didn't get anything over 300 HP until the 390 V8 the following year (320 HP) and of course it kept climbing from there peaking during the major muscle car years between 68-71.