She was sitting with her arms wrapped around her knees, resting her chin on her clasped hands.
Literal
She [topic-は] arms [with-で] knees [object-を] hugged-in, clasped hands [possessive-の] top [on-に] chin [object-を] was-resting.
A descriptive scene-setting sentence with two conjoined actions. 抱え込み uses the conjunctive masu-stem (連用中止法) to link the first action to the second — a literary clause-joining technique. 組んだ手 ('clasped hands') is a relative clause modifying 手. The sentence has a novelistic quality, painting a physical posture in detail.