Specifically, I am thinking of The Rime of the Ancient Mariner, in which there is a 3rd person narrator referring to the Ancient Mariner who is telling a story to somebody else. The whole story is basically the Ancient Mariner's but told in this fashion via a 3rd person.
Example:
The literary work used _______ ; a method of telling a story within a story
Best Answer
A story within a story might seem a bit simplistic but hits the nail on the head. The Wikipedia page also refers to the phenomenon as a 'nested story'.
If you want to seem a bit more academic, then the term I recommend is embedding.
(Routledge Encyclopedia of Narrative Theory)
The same encyclopaedia also talks about 'frame theory' which is worth a read.