Hobbit taking on a city (6)
I believe the answer is:
bilbao
'city' is the definition.
(I have seen 'European city' mean 'bilbao' so perhaps 'city' could also mean 'bilbao')
'hobbit taking on a' is the wordplay.
'hobbit' becomes 'bilbo' (Bilbo Baggins, a hobbit from The Lord of the Rings).
'taking on' means one lot of letters goes inside another.
'bilbo' going around 'a' is 'BILBAO'.
(Other definitions for bilbao that I've seen before include "Basque capital" , "Spanish town" , "Spanish Basque port" , "European city" , "Spanish city, home to the Guggenheim Museum" .)