1000 are encircling a Spanish city (7)
I believe the answer is:
granada
'spanish city' is the definition.
(Granada is a city in Spain)
'1000 are encircling a' is the wordplay.
'1000' becomes 'grand' (grand can mean a thousand pounds or dollars).
'are' becomes 'a' (short for 'are', historical unit of measurement).
'encircling' means one lot of letters goes inside another.
'grand'+'a'='granda'
'granda' going around 'a' is 'GRANADA'.
(Other definitions for granada that I've seen before include "City of Andalusia" , "Andulasian city" , "City in southern Spain, site of the Alhambra" , "sunny city" , "Spanish city, site of the Alhambra" .)