The most common and most likely answer to this crossword clue is the 8 letter word ERL-KING
I've seen this crossword clue in Independent
E
R
L
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K
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G
More clues leading to the result ERL-KING
Buddy explains!
The straight part
We know that "German folklore character" is the straight/definition part of the clue. The straight part is often a synonym or definition, in this case german folklore character = erl-king.The cryptic/wordplay part
In cryptic crossword there's often an wordplay/cryptic part as well.This part involves a more complex hint, such as an anagram, homophone, hidden word, etc.
Sadly, We don't have an explanation for this specific crossword clue yet.
What does ERL-KING mean?
ERL-KING noun- In German literature and modern pseudo-mythology, a malicious elf or spirit who preys on children.