CGF files should go into Root/Game/Objects folder (you can add subfolders if you want).
As for using it as your terrain (keep in mind that what i'm saying here is based mostly on CE2) if your mesh has collisions then you just need to drop it in. If you want to get rid of the default terrain and water then try this - http://www.crydev.net/wiki/index.php...Level_in_Space
(that's for CE2 though, so I'm not sure if it still works).
Do you want to use the terrain layers and all of it's other features on your custom mesh? I'm not sure if that would be possible.
Hope that helps a little bit, I haven't had a chance to play with the CE3 for too long yet.