Power supply scheme for MCU-controlled garden lights

[resistor]

Hi folks,

My front yard has walkway lights that are powered by 12VAC (from a big transformer in my garage). I'm trying to build an bulb replacement for them that will use an MCU + yellow/orange LEDs to make them look like flickering torches. I think I have a good idea of how to do the flickering and the interfacing to the bulb socket, but I'm having some issues designing the power supply system.

Obviously I'm going to have to rectify and regulate the 12VAC down to 5V or 3.3V for the MCU. The question, then, is how to power the LEDs. I can use an LED driver IC powered by the the logic Vcc, or I could do a DIY constant current source powered by the (rectified and filtered, but unregulated). Maybe there are other options to consider?

My biggest constraint here is area. The enclosures of these lights aren't too big, and don't have a lot of air circulation. I've nervous about dissipating too much heat (I haven't picked the LEDs yet, but I suspect they'll be 1-2W total), as I don't really have the space to add heat sinks.
Thanks!

[mariush]

reuse the 12v ac

bridge rectifier, capacitor, mc34063 buck regulator to get 3.3v or 5v.. power the leds from the same 3.3v or 5v you use for the microcontroller.  the microcontroller can even drive the leds directly from its I/O pins if needed
 
In theory, I suppose you could use a few 555 timer chips to get the leds to flicker and simulate the fire... this may save you the trouble of getting 3.3v and 5v, as the 555 chips can usually work with up to about 16v, so you could just use a single diode and a capacitor for half wave rectification (and get 5-16v)

[Harvs]

Just something to consider if you need a bit of light, I got some of these for some wood shed lighting thinking they'd be crap but worth a try:
http://www.ebay.com.au/itm/400498138585?var=670099942444&ssPageName=STRK:MEWNX:IT&_trksid=p3984.m1439.l2649

To be honest I'm pretty stunned.  At just over $1 each they're awesome.  Not really a pleasant enough colour for indoor use (a bit yellow), but fine for general outdoor lighting.