The Key of Terror is required to open the first red portals in the Pandemonium Event and can only be found from certain boss monsters, and only on Hell difficulty.
Get the Key of Terror from The Countess, the Key of Hate from The Summoner, and the Key of Destruction from Nihlathak. It's a good idea to have 3 of each key before beginning the second stage of the Pandemonium Event, for reasons explained in the Pandemonium Event article.
The keys look identical, and can only be discerned between by hovering on them to see their name.
Key of Terror
These are dropped by The Countess, who is located on the fifth level of the Forgotten Tower in the Black Marsh, Act One. She is commonly run for her rune drops, and will drop a Key of Terror about 8% of the time she dies on Hell difficulty.