Country surrounding an American state (7)
I believe the answer is:
indiana
'american state' is the definition.
(Indiana is an example)
'country surrounding an' is the wordplay.
'country' becomes 'India' (India is an example).
'surrounding' means one lot of letters goes inside another.
'india' placed around 'an' is 'INDIANA'.
(Other definitions for indiana that I've seen before include "state of America" , "State in which one may find Gary" , "State south of Lake Michigan" , "Part of US" , "-- Jones, Harrison Ford role" .)