I have searched through both the clymer manual and the service manual but cant find out what the purpose of this connection is and whether it is essential. I have a 1974 Dt100 which I am rebuilding and am planning to strip out all the non-essential wiring leaving just what is required to operate the bike. I will be connecting a headlight and flashers. But i can't figure out whether this connection is essential or even what it is. any help would be appreciated. I am attching a photo

I don't profess to be absolutely certain , but the older 250's and 360's had
exactly the same loose terminal in the stator loom .
It was there as an aid in setting timing , and had no other purpose .
It's very likely the same in your case .

Yamaha didn't include much "extra" wiring so not sure what you'll gain?

Should be obvious if you have the bike in front of you that wire you've circled connects to the neutral switch.  (If it isn't obvious, you might think twice before removing wires?)  Switch grounds when in neutral to turn on the neutral indicator light in the speedometer...  that's really be the only wire you don't "need" to be legal so you'll save one wire. 

Thanks mark - yup from the position it is the neutral switch - the wiring harness is completely wrecked on the bike so I hope to reword in a minimal fashion which will allow the bike to run and have some light when it's running - unlikely it will get ridden much on the road or after dark

If it's a black wire it'll be points related. Your choice if you want to run a kill switch there or use it to check moment of points breaking with a meter. Most important though is the color before getting carried away. If light blue i think that was neutral light to the terminal on the crankcase--if fitted.

thanks - it is light blue and goes to the crankcase - i hadnt thought about a neutral light until Mark mentioned it - but looking at it im pretty confident now that is what it is

Yes, light blue is neutral switch.