Isolated area in French grotto containing lake (7)
I believe the answer is:
enclave
'isolated area' is the definition.
(I've seen this in another clue)
'in french grotto containing lake' is the wordplay.
'in french' becomes 'en' ('in' in French).
'grotto' becomes 'cave' (I've seen this in another clue).
'containing' means one lot of letters goes inside another.
'lake' becomes 'L' (geographical abbreviation).
'cave' going around 'l' is 'clave'.
'en'+'clave'='ENCLAVE'
(Other definitions for enclave that I've seen before include "Part of country surrounded by foreign territory" , "Distinct community" , "Vatican for example" , "Group that's surrounded" , "ghetto" .)