Interesting thread.
One thing that seems to be getting far too much airplay here is the concept of needing magic and things that go *boom* to commence the terror campaign.
I'd suggest that while that might be an element of it - but only later on as the campaign is well underway and very mature. That would be the point where the intensity of the terror campaign ratchets up a nasty notch. Perhaps after the authorities respond with a horrible reprisal that provokes a wizard to join the terrorists.
The best way to unleash this scenario as a terror campaign is to ratchet up the terror over a number of sessions. From kidnappings and public display of murdered victims hanging from a streetlamp, crop burnings, small arson...then let the PCs be in part of the process and planning in charge of "protecting" the city and finding the terrorists.
Anyways my real point is this: this is medieval technology. All you need in that era to spread terror is a city, some grimly determined people and fire arrows in the night. Arson is the ultimate terror weapon. It isn't today as buildings are constructed so they don't spread fire as quickly, don't burn as easily and we can put the fire out far more effectually.
In a bucket brigade society, fire as a weapon of terror is far more practical. The only problem is employing it in a way so the fire starters get away fast enough before the flames are noticed (a difficult feat in a dark city/town).
Chasing terrorists over roof tops as they flee from their attack would be a great scenario. Throw some more situations like:
1 - chase terrorist or save screaming children in burning bedroom?
2- wagons of oil blocking off most exits from a crowded market area in broad daylight... then the arsonists attack. (This would be an audacious attack at the end of the terror campaign I think.)
3- outraged citizens demanding bloody reprisals against who they see as the perpetrators. Have their be disagreement over who is to blame. Have the citizens not care WHO you kill - just get "the bastards"
4- Bloody reprisals and brutal subjugation by the authorities against innocents. (this is important I think. Show both sides of the story here)
5- long line ups in and out of the city as every wagon is checked and commerce slows to a crawl
6- for best effect, have your terrorists have a just cause. Make your authorities occupiers of lands, executioners of innocents - something nasty and *wrong* which might be a cassus belli
I honestly think this would be a MUCH better campaign plot without resorting to magic - or at least much of it - to conduct the terror campaign. Magic employed to prevent scrying and magical detections perhaps so that does not become an easy way out,. but otherwise, try to go low tech if you can.
This way, the PCs will have to think like terrorists to predict the next weapons and weaknesses of the city. Magic increases the possibilities of targets and chaos greatly- -but should be more of an end-game than a beginning to the terror campaign.
Lastly, there is an ideally suited campaign world for this plotline coming out this November. The Black Company is being published by Green Ronin. The Black Company itself confronted terrorists throughout its tenure as mercenaries in service of the Lady, and used terror as a weapon in the service of Darling and the Rebel and later in the Books of the South. "Water Sleeps" is *about* the Black Company acting as guerillas and terrorists in an urban environment.
Very grim and gritty campaign.
If you are meaning it to be an object lesson, throw in enough moral ambivalence so over time the good guy/ bad guy stuff starts to get really slippery to identify and let it all "slouch down the road to be born in a City of Gray".
Sounds like a good campaign to me.