Question: Can the CY7C68001 be used with a MPC860 as a host in a USB network? If not, what is the alternative device for this application. If it can, is there a special configuration to set it up as the HOST or peripheral?
No, CY7C68001 cannot be used as a USB host. The CY7C68001 can only function as a peripheral slave device. The MPC860 can act as an external master to the CY7C68001 (SX2) device. Together they form a USB peripheral-only function.
You can take a look at the following three parts SL811HS, EZ-Host and EZ-OTG. These are the Cypress parts that support host functionality.