Rendering at 1280 x 960 is incorrect has you have found out, thta's the reason why you were seeing the textures as small strips, these are the only sizes that you will be able to render your tiles at when using Terragen.
Terragen (free version), 512X512 only
Terragen (registered version), 512x512, 1024x1024, 2048x2048, 4096x4096
To change the colour of the textures to something that's more suitable to the area that your designing you will be able to do this when using Terragen.
Try this link you may find it hepful, if your still having problems, post a pm.