The 8086 had a 20 bit address bus, allowing for 1 megabyte of accessible main memory. However, to maintain compatibility with the 8080 CPU that was popular in CP/M circles, the 8086 addressed memory in 64KB segments. This would be seen as a major fault in the x86 architecture.
The 8088 is the 'low cost' version of the 8086. While it retained the same addressing modes, and instructions, the external data bus was 8 bits wide. The 8088 was the primary CPU found in the IBM PC and the IBM XT. This is why the original ISA slots were 8 bit.
The 8088 can be thought of sharing the same relationship with the 8086, as the Intel 80386SX had with the Intel 80386. While the data bus was restricted, the address bus was not, and the 8088 could still address a full megabyte of memory (in 64 KB segments).