1795, in specific sense of "government intimidation during the Reign of Terror in France" (March 1793-July 1794), from French terrorisme, noted in English by 1795 as a coinage of the Revolution, from Latin terror "great fear, dread, alarm, panic; object of fear, cause of alarm; terrible news," from PIE root *tres- "to tremble" (see terrible).
If the basis of a popular government in peacetime is virtue, its basis in a time of revolution is virtue and terror -- virtue, without which terror would be barbaric; and terror, without which virtue would be impotent. [Robespierre, speech in French National Convention, 1794]
General sense of "systematic use of terror as a policy" is first recorded in English 1798 (in reference to the Irish Rebellion of that year). At one time, a word for a certain kind of mass-destruction terrorism was dynamitism (1883); and during World War I frightfulness (translating German Schrecklichkeit) was used in Britain for "deliberate policy of terrorizing enemy non-combatants."
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