Alien occupies smart milieu (7)
I believe the answer is:
setting
'milieu' is the definition.
(thesaurus)
'alien occupies smart' is the wordplay.
'alien' becomes 'et' (extra terrestrial).
'occupies' indicates putting letters inside (inserted letters occupy or enter the word).
'smart' becomes 'sting' (both can mean to burn or hurt).
'et' put into 'sting' is 'SETTING'.
(Other definitions for setting that I've seen before include "Environment" , "Scene" , "Mount for gem" , "situation" , "Dropping beneath the horizon" .)