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I'd like to have a sidebar widget that has my latests featured posts, which would be marked as a category or tag. Is there a way to do this with the new custom menus, and if not, is there a plug-in that can accomplish this?

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Do you mean you'd like to flag posts with either a certain category or tag in order to cause them to appear in the widget? – tnorthcutt Aug 23 '10 at 15:24
Do you just want to show the permalinks or do you also want the excerpt? How many posts do you want to show? – Chris_O Aug 23 '10 at 15:41

You can absolutely have a sidebar widget that shows posts from a certain category. First, set up your new menu. Click on Menus under Appearances. Then click the plus button towards the top right, and give your new menu a name: new menu

After you've clicked Create Menu, you'll be taken to a screen to choose what appears in that menu. Towards the bottom left, you'll see a box labeled categories, with the option to choose from most used or all categories, and to search your categories. Go ahead and choose the category or categories you want to include in this menu, and click Add to Menu (and be sure to click Save Menu at the top right when you're done!):

choosing categories

Finally, head over the Widgets screen (also under appearances). There, drag the Custom Menu widget over to a sidebar area, give it a title if you'd like and choose your new menu from the drop down. Don't forget to click save!! adding widget

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GREAT ANSWER! Love the screenshots and hand-drawn circles and arrows. – MikeSchinkel Aug 23 '10 at 19:20
Thanks. I figured the hand drawn circles would be appropriate... see here: meta.stackexchange.com/questions/19478/the-many-memes-of-meta/… – tnorthcutt Aug 23 '10 at 19:36
I tried this, and this displays a link to the category itself. I was looking for a menu that would show most recent posts in that category. still good to know though. – GSto Aug 25 '10 at 0:06

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