Priest occupied by naughty dance (7)
I believe the answer is:
lambada
'dance' is the definition.
(Brazilian dance)
'priest occupied by naughty' is the wordplay.
'priest' becomes 'lama' (lama is a kind of priest).
'occupied by' indicates putting letters inside.
'naughty' becomes 'bad' (badly behaved).
'lama' placed around 'bad' is 'LAMBADA'.
(Other definitions for lambada that I've seen before include "dance in South America" , "Lively Brazilian dance" , "Latin-American dance" , "few steps?" , "number of Brazilian revellers" .)