I'm surprised no one touched on this more, but the freakest thing I've seen on Fraggle Rock was the aforementioned Terrible Tunnel. Wembley goes through it and sees ghosts, and hears weird voices, and then there's that weird rock formation that looked like teeth, and chewed things.
I haven't seen the episode since I was, like, 5, so my memory's a little fuzzy on it.
I do recall that it was made clear that very few fraggles came out of that alive..