Dancing nude with elf, it's essential (7)
I believe the answer is:
needful
'essential' is the definition.
(thesaurus)
'dancing nude with elf' is the wordplay.
'dancing' indicates an anagram.
'with' means one lot of letters go next to another.
'nude' after 'elf' is 'elfnude'.
'elfnude' with letters rearranged gives 'NEEDFUL'.
'it's' is the link.
(Other definitions for needful that I've seen before include "Poverty-stricken" , "Requisite, necessary" , "Indispensable" , "poor" , "Required" .)