We report the Chandra discovery of an X-ray cluster at redshift z = 1.063 associated with the Compact Steep Spectrum radio loud quasar 3C 186 (Q0740+380). Diffuse X-ray emission is detected out to ~120 kpc from the quasar and contains 741+/-40 net counts. The X-ray spectrum of the extended emission shows strong Fe-line emission (EW=412eV) at the quasar redshift and confirms the thermal nature of this diffuse component. We measure a cluster temperature of 5.2(+1.2/-0.9) keV and an X-ray luminosity L(0.5-2 keV) ~ 6e44 erg/sec, which are in agreement with the luminosity-temperature relation for high-redshift clusters. This is the first detection of a bright X-ray cluster around a luminous (L_bol ~1e47 erg/sec) CSS quasar at high redshift and only the fifth z>1 X-ray cluster detected. We find that the CSS radio source is highly overpressured with respect to the thermal cluster medium by about 3 orders of magnitude. This provides direct observational evidence that the radio source is not thermally confined as posited in the ``frustrated scenario for CSS sources. Instead, it appears that the radio source may be young and we are observing it at an early stage of its evolution. In that case the radio source could supply the energy into the cluster and potentially prevent its cooling.
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