What tool is used for this ...

 Forstner bit

Forstner bit

I want to make very shallow 7mm circular recess in a piece of wood in which I will place a 7mm swarovski crystal (I will be doing 6 of these is a row on a 4 inch long 1/4 inch thick piece of wood.

What kind of tool do I need to do this (to make it exactly 7 mm without worrying about making it too large)?

A: I recommend a drill bit, specifically a 7mm forstner bit (on right above), if you can find one that small. If you can't then a regular drill bit will work.

The forstner bit is good because it drills a nice flat bottomed hole. My next recommendation would be the brad tip bit like the twist bit on the right above. The tip gives you more control when placing the bit.

If you have a drill press great, set the depth you want. If you don't then you can attach a bit of tape at the appropriate depth. If you use tape be aware that the heat of the drill can loosen the glue, so keep an eye on the tape to make sure it hasn't moved.

Hope this helps.
Have fun.

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