Clay

Clay is a block that is a light-blue/gray recolor of the Sand texture.

Clay can be found on the surface in groups of varying number usually surrounded by Sand. It is usually below water, but is sometimes found exposed in, around or under sand. It was uncommon, but was easier to find than other "rare" blocks (like Gold) due to the fact that one only needs to explore surface-level deserts or beaches to find it. As of 1.8, clay is commonly found at the bottoms of rivers and lakes in shallow, circular patches, disregarding adjacency to other types of blocks. Clay was a lot less common before the Halloween Update.

It can be mined with any type of tool, but Shovels are the optimal choice. Destroying clay blocks will yield 4 balls of Clay each, which can be crafted back into a clay block or smelted into brick.

By hitting F5, the camera goes into third person mode. You can then adjust the camera angle to easily see underwater. This is very useful for efficiently looking for clay blocks from a boat.

If you are having trouble seeing if a block is clay or stone, check for the characteristic lines of stone. Clay is usually a lighter color than stone and the texture is not linear. Clay sounds like dirt and gravel when stepped on or mined.

Trivia

 * In real life, Clay can actually be bright red, not just gray, and can be often found under the surface and away from sand.
 * Also in real life, clay can be man-made, by digging a pit and mixing earth and water there, after left alone for a nice time, the light particles of clay would float to the top, and could then be harvested.
 * If inventory space is tight, clay balls can be formed back into clay blocks using the 2x2 inventory crafting grid. As blocks, clay can take up to 4 times less space, but in order to revert the clay blocks back into balls for smelting into bricks the clay blocks must be placed and destroyed again.
 * Very rarely, a cactus can be found spawned on a clay block.
 * A clay block is the equivalent of a brick block, as clay balls can be smelted into bricks, which, like the clay block, can be made in the 2x2 crafting grid (ignoring texture and explosion resistance).
 * Also, on rare occasions, Clay can be found in Minecraft: Pocket Edition, although when destroyed, it does not produce clay balls. This also tags with Lava.