It appears that you are using Terragen 0.9 (judging by the finite area of the terrain). In TG 0.9 you cannot go above the sky, while in TG2 you can. The size of the sky is also finite in TG 0.9, whereas in TG2 it is global (spherical). In TG 0.9 even when you are not above the sky you may need to increase the sky size to make sure it covers enough area to avoid black lines at the horizon (where the sky ends). All in all an upgrade to TG2 is advised as it's much more capable and resolves these long-standing issues.
- Oshyan