Wine produced by terrorists (7)
I believe the answer is:
madeira
'wine' is the definition.
(Madeira is an example)
'produced by terrorists' is the wordplay.
'produced' becomes 'made' ('make' can be a synonym of 'produce').
'by' means one lot of letters go next to another.
'terrorists' becomes 'ira' (Irish Republican Army).
'made'+'ira'='MADEIRA'
(Other definitions for madeira that I've seen before include "Portuguese North Atlantic island" , "Sponge-cake" , "Portuguese island, capital Funchal" , "cake producer" , "Atlantic territory" .)