ALPS, a maker of rotary encoders, recommends 10K pullup to Vcc, then 10K in series with 0.01 uF to ground.
The internal pullup in the ATMega is loosely specified - somewhere in the tens of K, max 50K
On our "RadI2Cino" we provided pads for the RC series pair to ground, but not for any additional external pullup.
N5IB
