erm... a sky similar to which?
As far as terrain generation goes, the best bet is to use a combination of terrain and static mesh, and I would personally generate the terrain in Bryce or TerraBrush since it's bloody hard to make half-decent mountains with the native UEd thing. You can also round out the look very well by a combination of mountainous terrain / static meshes in the level and a sky texture with mountains + static meshes / terrain in the skybox itself. Plus Fogrings in the level AND skybox. And distance fog in the level.
Add some careful painting and smoothing and texturing, and things should look fine.
There's a lot goes into making a decent environment, and people can easily tell if all you've done is slapped textures on a skybox, unfortunately. You see why too many UT maps are underground hallway-room affairs, yeah? Or FLOATING IN SPACE LOL. Even Face3 wasn't floating in space.
Quick ideas on best implementation of fog / clouds:
Clouds painted on skybox texture + at least two slow-pan / alpha masked cloud planes in the skybox with some nicely expressive lighting + distance fog in the level + a very subtle fogring in the skybox.
Fog is way to easy to overdo, so be careful setting the parameters. You really either have to go very thin or very thick in most situations, and always try to play it off the general colours in the level or things will look super gay when partially-occluded or suddenly popping up in the fog.
Fogrings tend to have noticeable edges if you aren't careful, not at the texture seam, but at the tops... even though they fade nicely, there's going to be discrepancy between the top of the ring and the closest cloud plane, so that needs to be addressed with just a bit of careful lighting. Usually I find I have to play with the ScaleGlow on the fogring to get it to blend well, because if you just start making all kinds of things Unlit you end up with horror that you can't even light.