State has endlessly dry area with dam in the middle (7)
I believe the answer is:
arizona
'state' is the definition.
(Arizona is an example)
I cannot understand how the remainder of the clue works.
(Other definitions for arizona that I've seen before include "Dry US state" , "American state, capital Phoneix" , "US state, home to the Grand Canyon" , "State of southern US" , "State of SW USA" .)