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Contemporary civil wars constitute a major source of global terrorism. Yet, only a minority of rebel groups use terrorism. Why do some rebel groups resort to terrorism tactics while others refrain from doing so? We present a theory of terrorism in civil war focusing on the relationship between battlefield dynamics and rebels' degree of vulnerability to the political costs of terrorist violence. We argue that rebels resort to terrorism strategically to mobilize support following major battlefield losses. This mobilization effect, however, only occurs when rebels can exploit terrorism to provoke indiscriminate repression while avoiding punishment from their constituency. Instead, when rebels expect terrorism to backfire, battlefield losses produce greater restraint. Drawing on new disaggregated data on rebels' terrorist attacks in civil wars (1989-2011), and on a quantitative case-study of ISIS terrorist tactics in Iraq and Syria (2015), the analysis offers strong support to our theoretical argument. Our findings have important implications for research on terrorism, civil wars, and for counterterrorism policies.