If you need cloth, fluid, smoke, particle, or hair simulation, your best bet is to use the compositor. The terrain and much of the color shader information can be exported from Terragen 2. This can be loaded into Blender as an object and the terrain image can be mapped onto the terrain object in Blender.
The difficult part is getting things to scale. Blender units are not actual 'real' world measurements. I would use some objects in Terragen 2 to help with this. Objects that you know their locations. Keep them at easily scaled positions, like 1000 or 10000. It's not to hard to triangulate the camera location/angle and sunlight angles.
The imported terrain will help with proper shadows also.
I have tried this a few times, but the results were not so great. I have not tried it with the new terrain export feature in Terragen 2.3.
