The render layer has distance settings that are supposed to do this, but they don't work with terrain yet.
Another solution is to change the radius of the background sphere (part of the default project). Just make sure it still has a negative number, which is needed because we're looking at it from the inside. There may be some overdraw inefficiencies, but it should produce the end result that you want. You can also set most objects to "Holdout" mode, and this way you can use other objects as background clipping surfaces. Holdout mode is only in the Professional edition, but you can create a holdout effect in any edition of Terragen 3 by copying the internal shader from the default background sphere.
Matt