Grows old, returning to sleep with dreams on vacation (7)
I believe the answer is:
expands
'grows' is the definition.
(expanding is a kind of growing)
'old returning to sleep with dreams on vacation' is the wordplay.
'old' becomes 'ex'.
'returning' says the letters should be written in reverse.
'to sleep' becomes 'nap' (napping is a kind of sleeping).
'with' says to put letters next to each other.
'on vacation' means to remove the middle letters.
'dreams' with its middle removed is 'ds'.
'nap' in reverse letter order is 'pan'.
'ex'+'pan'+'ds'='EXPANDS'
(Other definitions for expands that I've seen before include "gets bigger" , "Becomes larger" , "Enlarges" .)