Sovereign setting up theatre in Italian capital (7)
I believe the answer is:
emperor
'sovereign' is the definition.
(emperor is a kind of sovereign)
'up theatre in italian capital' is the wordplay.
'up' is a reversal indicator (in down clue: letters go upwards).
'theatre' becomes 'rep' (I've seen this in other clues).
'in' is an insertion indicator.
'italian capital' becomes 'rome' ('Rome' can be a synonym of 'italian capital').
'rep' going into 'rome' is 'rorepme'.
'rorepme' in reverse letter order is 'EMPEROR'.
'setting' acts as a link.
(Other definitions for emperor that I've seen before include "Napoleon Bonaparte, for instance" , "A moth; a penguin" , "Large colourful butterfly" , "He rules over several states" , "Beethoven's Piano Concerto No. 5 in E-flat major" .)