Clay

Clay is a block that can be smelted to form terracotta and is usually found in locations where both sand, dirt and water are present, most commonly appearing in shallow water, especially along the coast of island groups. When mined, four clay balls will drop; those can be smelted into bricks.

Breaking
Clay blocks can be mined with anything, but shovels are quickest. Destroying a clay block yields 4 clay balls. If broken with a tool enchanted with silk touch, it drops itself instead. Destroying a clay block with a tool enchanted with fortune does not increase the amount of clay dropped.

Natural generation
Clay is most commonly found underwater in swamps, beaches, oceans and at the bottoms of rivers and lakes in shallow, crystal-shaped disks, disregarding adjacency to other types of blocks.

Clay generates in mason houses in plains, savanna and desert villages, and under fisher cottages in taiga villages.

Clay generates in large quantities on the floors of lush caves' ponds.

Clay can generate in lush caves in the form of mineral veins. Clay attempts to generate 15 times per chunk in veins of size 0-160, from elevations 0 to 60. Clay can replace stone, diorite, andesite and granite.

Villager gifts
$$, when the player has the Hero of the Village status effect, a mason villager might throw that player a clay block as a gift. This is the only renewable way of obtaining clay, clay balls, and uncolored terracotta.

Note block
Clay can be placed under note blocks to produce flute sounds.

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Trivia

 * In real life, clay can actually be reddish-brown, not just gray, and can be often found under the surface and away from sand. This color is reflected in the appearance of terracotta, bricks, and flower pots.