You can do this sort of thing with TG2. The other advantage of TG2 is the fractal detail that can be added to terrains, which helps to fill in the smoothed terrain with pretend detail, making the terrain appear as if it has a much higher resolution than it actually has.
SRTM 3 (holes patched) is available from <
http://srtm.csi.cgiar.org/>. They have a Google Earth overlay cataloguing the data as well which makes things nice and easy. <
http://www.ambiotek.com/srtm>
Below is a quick test render from a 20 degree wide terrain centred on the Grand Canyon with bugger all surfacing. I'm not sure how big a terrain you can use before it becomes too distorted by the projection... but 20 degrees is reasonably big, wider than the Grand Canyon image on that site anyway.
The supplementary images I'm preparing for distribution with my terrains would help with creating masks to produce realistic images like these (with some work from the end user), although the data I'm accessing is restricted to the US <
http://seamless.usgs.gov/website/seamless/viewer.php>
