Imagined setter being enveloped by fear (7)
I believe the answer is:
dreamed
'imagined' is the definition.
(dreaming is a kind of imagining)
'setter being enveloped by fear' is the wordplay.
'setter' becomes 'me' (the setter of the clue).
'being enveloped by' means one lot of letters goes inside another.
'fear' becomes 'dread' (synonyms).
'me' put inside 'dread' is 'DREAMED'.
(Other definitions for dreamed that I've seen before include "Fantasised" , "suffered delusions" , "Imagined" , "Had a vision" , "had nightmare" .)