Not for the last time, the British had grossly __________ the toughness of local fighters, and the very __________ kind of terrain from Europe.

The sentence intends to convey that the British failed to gauge the level of resistance that will be offered by the local rulers and the difference in the terrain.

Let us try to fill the second blank first.

The preposition 'from' has been used after the blank.

'Similar' will take the preposition 'to'.  Therefore, we can eliminate option C.

Before the first blank, the term 'grossly' has been used. 'Understood' and 'misrepresented' cannot be used to fill the blank since the term 'grossly' intends to convey that the British were way off the mark. Therefore, 'underestimated' is the correct term to be used. Option B is the correct answer.