Fabric might be most ghastly when covering Edward (7)
I believe the answer is:
worsted
'fabric' is the definition.
(worsted is a kind of fabric)
'most ghastly when covering edward' is the wordplay.
'most ghastly' becomes 'worst'.
'when covering' means one lot of letters go next to another.
'edward' becomes 'ed'.
'worst'+'ed'='WORSTED'
'might be' acts as a link.
(Other definitions for worsted that I've seen before include "Woollen fabric" , "Wiped the floor with" , "Took to the cleaners" , "Fabric made from fine smooth wool yarn" , "Set word (anag.)" .)