I made some concept drawing for the terrain area of a game with some mountains, rivers, and islands and now i wish to create a realistic heightmap image that represents this terrain with the water level being below some color intensity value. Is there any tool or technique that will let us create realistic terrain like those fractal landscapes but while controlling the shape of it and being able to place mountain locations, rivers and other things?

I'm sure that there are tools that allow you to create greyscale heightmaps using fractal technics and so on. One example is Byrce (although I'm not sure if it is possible to export the heightmap).

Personally I use a paint package (Paint Shop Pro) to draw the landscape (making heavy use of smudging and smoothing tools). This gives a good starting point, but especially if you only have 255 different heights possible (normal for a greyscale heightmap) this will need fine tuning ... particularly at sea level in order to get a smooth coastline.

Therefore what I've done is add a tool in the game engine that allows me to edit the basic tertain (taken from the heightmap) and adjust individual points, allowing for many more than 255 different heights ... the heightmap is the basis for the final terrain, but is not actually used by the game engine itself as it doesn't give me the quality I need in the end.