Officer in police operation undercuts Capone, offering diluted booze (7)
I believe the answer is:
alcopop
'diluted booze' is the definition.
'officer in police operation undercuts capone' is the wordplay.
'officer in police' becomes 'cop'.
'operation' becomes 'op'.
'undercuts' says to put letters next to each other (in a down clue, some letters go beneath others).
'capone' becomes 'al'.
'cop'+'op'='copop'
'copop' after 'al' is 'ALCOPOP'.
'offering' acts as a link.
(Other definitions for alcopop that I've seen before include "Intoxicating beverage tasting like a soft drink" , "Intoxicating drink resembling a soft drink" , "which is sweetly intoxicating" , "drink young people like" , "drink favoured by youngsters" .)