Is this a direct output from Terragen, or did it go through some other program?
8-bit images (8 bits per channel, 24 bits in total) can only display 256 different shades of each colour channel, and so can your monitor (probably). With dark gradients like this you probably only have a few dozen possible shades. If we create a perfectly smooth gradient in software and convert each pixel value to the nearest possible shade from 0 to 255, this will create visible bands. Terragen 3 overcomes this problem when it saves 8-bit images by adding some random noise to each pixel value, a technique called dithering, which should hide the bands and replace it with barely-noticeable noise. However, there are many different things that can happen while you're manipulating images which can destroy this detail and cause the banding to return, or even get worse.
1) If you save a JPG with any amount of compression, this dithering is usually lost and the banding returns.
2) If you save an EXR out of Terragen, it doesn't add any dithering because EXRs are expected to contain the most precise information about the original colour and they are not limited to only 256 shades. But the problem is, if you look at this EXR on your monitor (which probably only shows 256 different shades ), you will see bands. And when you convert this EXR an 8-bit image, it will create bands. So it's up to you to add some noise or grain in whatever other app you're using to process the EXR before you save it as an 8-bit image. Still, if you save as JPG, see point number 1. JPG does offer some lossless modes that should preserve the noise/dither, and there are other formats you can choose such as PNG and TIF which are lossless and should keep the noise/dither.
3) If you do any kind of colour adjustment on an 8-bit image, the banding gets worse, and usually becomes less regular too, but I don't think that's happened here.
Matt
