There is a way around this, and I did work it out (using I think it was 3 render pass’s) and did a test render that can be found here: http://au.youtube.com/watch?v=eSrdZETmT4s (that was a basic test, still had to tweak the lighting settings etc).
The bad news, I have lost all the files I used to create this, and the details of how I did it (I think it was on my old computer that crashed). I have lately wanted to get back into some of this, but have come up with a few issues. The new version of ter2blend seems to do some weird things with lighting, and I cant find the blend2ter script anywhere now!!!
Basically the way you have to do it is use layers and render a layer at a time:
layer 1: objects from terragen as shadow only, and not giving shadows. Any blender objects should not be rendered, but only cast shadows. This gets the shadows from blender objects onto the terrain.
layer2: objects in blender as shadow only and terragen objects as cast only. This will take the shadow from the landscape and cast it onto blender objects.
layer3: Render blender objects and the shadows cast between them.
Of course in the background you will have the exported image from terragen. This will work most of the time, not sure if there may be a few minor issues when various shadows overlap, but should be pretty good. In 3ds max there is a material called shadow matte which you would use for the terrragen landscapse, and just set its softness etc and all would be automatically done, but as far as I know there is nothing like this in blender.
So does anyone know where I can get a copy of blend2ter and maybe older versions of ter2blend? The copies on the blender projects server dont all seem to work.
Edit: this link: http://blenderscriptstorage.googlepages.com/Ter2Blendv4p.zip is now working again and has the latest blend2ter and ter2blend scripts, still have to test the lighting issues.