depends which country is nuked... nuking a city in russia would "arm" the "dead hand", which triggers automatic ICBM response. sources say it is turned off if there is not a crisis. it is a dark relict from cold war.
if a nuclear weapons state or NATO state city is nuked, all hell brakes loose. when saddam attacked israel with scuds, the us potus and state department almost could not stop israel from retaliating and nuking iraq. it is possible to use fuel-air bombs or mini nukes - but it depends on the politicians and their military.
Dead Hand would launch a full scale war strike against NATO. I seriously doubt the Russians would arm such a system in the event of a terrorist attack against them. What do they have to gain by nuking the US and its allies if a second weapon detonates?
Iraq was a state actor during Gulf War 1. Raining missiles on Israel was an obvious ploy to try to create a split in the coalition forces if Israel involved itself in retaliation, but it wasn't terrorism. For Israel to use nuclear weapons in response to scud attacks would likely be national suicide. Israel would lose all international support if they engaged in such a ridiculous overreaction. Without support from its big allies, Israel would cease to exist in short order.
If we are talking about a small nuke blowing up in a random NATO country in an apparent terrorist strike, all hell would not break loose. If the source of the weapon is found, and the nation hosting the source refuses to cooperate, I would expect a punishing air campaign to destroy the source of the weapon and the government of the hosting nation. Use of ground troops would depend on how effective the air campaign could be at wiping out those responsible. The US has already suffered over 57,000 total casualties just in Iraq and Afghanistan, and about 10,000 deaths total in the War on Terror. However, the US has taken almost no action against Pakistan, which while having a US friendly government, is also the new base of both Al-Qaeda and the Taliban.