Wool

Cloth is a set of 16 blocks added in update 0.0.20a. All 16 blocks are identical except for the different colors (and three shades of gray). Each block has 1 texture that is put onto all sides of the block.

In Creative mode, all colors of cloth are available for use. Cloth is often used for pixel art (the reason it was added in the first place) and to make colorful buildings and structures. Another common use is to make rainbows, sometimes in the form of towers or carpeting.

In all Survival modes, attacking a Sheep will cause a few blocks of white cloth to drop. White cloth is the only color that be obtained normally, to use it in Survival Mode Test and Indev it must be pre-placed into the map file. Colored cloth will cause Infdev and Alpha to crash as the blocks do not exist in the clients anymore. Cloth is a very weak block. It doesn't protect against explosions and is flammable. It can easily be mined without using any Tools.

Cloth's only crafting use is to make Paintings. Cloth can be crafted out of 9 string blocks in a 3x3 square. This may seem a very demanding price, however string has no use once a Bow has been made. Still, obtaining cloth from sheep is much faster.

Trivia

 * All cloth blocks, except for the white cloth appearing in Infdev and Alpha mode, are being removed from the game. Notch is adding a function to the game that will allow it to make the texture of a block different colors. This means many colors of cloth can be made out of just 1 actual block type, being much more efficient in game space rather than 16 block types that are all nearly identical. This function will likely be used through craftable dyes.
 * Before actual Leather was added, cloth was used to craft Leather Armor.