posted 10-26-11 03:24 EST (US)   
This tutorial will explain how to make a basic tunnel, results shown are crude but given time and patience you can achieve far better results. Be prepared to get fustrated though!
Anyway let's begin.
With the landscape tool selected and the brush set to Raise/lower, Paint a hill at the height you want your tunnel at:



No need to make this look pretty, we are using it simply to take a height sample and then it will be deleted. Next select the absolute height brush located under the same landscape tab.
ctrl+right mouse click will take a height sample and ctrl+ left mouse click will paint at the desired height. Knowing this, hover over the peak of the hill we made and ctrl+right click



Now we have our desired height and can paint the terrain needed for the walls of our tunnel or cave. ctrl_left click and drag out two walls



Time for the creative but very time consuming rock placement. Your options are limited to cliff rocks, these can be found in: Buildings tab - editor-only objects tab - cliffs
These are the only rocks large enough to give a desirable result, for the sake of this tutorial let's start with the biggest available, the cliff set object.
In this image below the stones on the ground indicate what can be placed with 1 click, I have put 2 on each side of the tunnel to give the result below.



It's a good start but much more time is needed to get a natural result, there are gaps galore and because the cliffset is only textured on 1 side we now have to fill in all the unnatural see through areas. This is where the other cliff types come in. For the sake of this tutorial I have gone with the cliff1 object.
This is tricky to explain but basically a cliff object can only be attached to terrain, therefore we must place our rocks in areas they have no place being and then move them manually. I have placed a stone at the entrance of our tunnel but don't worry because we can manoeuvre it where it belongs once it is placed



OK now it's time to move and rotate the stone. If you haven't done so already ctrl+right click to deselect everything. Once done make sure you have the move button selected (blue arrow in the top left of the editor) and double click the rock we need to move.
If done correctly you get this result, simply hold the left mouse button and carefully select the base of the yellow cube located in the absolute centre of the object. This allows you to hold the left mouse button and move in any direction, much easier than using the x,y,z arrows.



Rotating is done in the exact same way but instead of choosing the move button you select the rotate button located in the top left of the editor and rotate using the arrows provided in the middle of the object. That's about all there is to it, move and rotate large stones until you have something you are happy with. I'll skip through all the boring placement and finish with a complete tunnel.



I hope you find this useful and like the end result.
Have fun,
WL_D