Once a strange island by American continent (7)
I believe the answer is:
oceania
'continent' is the definition.
(thesaurus)
'once a strange island by american' is the wordplay.
'strange' indicates anagramming the letters.
'island' becomes 'i'.
'by' is a charade indicator (letters next to each other).
'american' becomes 'a' (common abbreviation - e.g. in organisation names).
'once'+'a'='oncea'
'oncea' anagrammed gives 'ocean'.
'ocean'+'i'+'a'='OCEANIA'
(Other definitions for oceania that I've seen before include "Pacific group" , "Islands of Pacific and adjacent seas" , "Pacific Ocean area" , "Pacific island region" , "part of the Pacific" .)