I have tried various combinations, and I found that:
* If the label's diffuse color is white or black, the text on the label does not show.
* If the label's diffuse color is red (255,0,0), the text on the label does not show.
* If the label's diffuse color is dark red (128,0,0), the text on the label shows, rather faintly:-
If the transparency texture map image is white text on black background, the text shows faintly as lighter than the dark red background.
If the transparency texture map image is black text on white background, the text shows faintly as darker than the dark red background.
In Poser the transparency map image is used directly to state how transparent each bit of the label is. If each bit of the image is t% transparency, it shows as (t% of the color of whatever is behind it) + ((100-t)% of the stated diffuse color of the label, for each of the 3 color components red,green,blue.
It seems that in Terragen this combining of the label's color and the color of whatever is behind it, is done in some other way than plain addition.