Remove the .cfg file you're trying to edit.
If you have copied the correct BIOS files in-place, the configuration file will be re-created with the right paths to the BIOS file(s) on the emulator's first run.
I don't have access to atari800 right not to check its behavior, but I don't recall using the keyboard being this 'jumpy'. Just for good measure, run an update for RetroPie and the system to make sure you're on the lastest version.