Fabulous creature seen in tunic or nightgown (7)
I believe the answer is:
unicorn
'fabulous creature' is the definition.
(I've seen this before)
'in tunic or nightgown' is the wordplay.
'in' says the answer is hidden in the clue.
'UNICORN' is hidden within 'tunic or nightgown'.
'seen' acts as a link.
(Other definitions for unicorn that I've seen before include "Mythical one-horned creature" , "Mythical beast like horned horse" , "Mythical animal like horse with horn" , "Representative of Scotland" , "Imaginary animal" .)