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. Clay is commonly found at the bottoms of rivers and lakes in shallow, circular patches, disregarding adjacency to other types of blocks. It is also most abundant in the ocean biome. Clay was a lot less common before the Halloween Update. The Potion of Night Vision, introduced in the Pretty Scary Update, has also made it much easier to scan lake or ocean bottoms for clay patches.
It can be mined with any type of tool, but shovels are the optimal choice. Destroying clay blocks will yield 4 clay balls each, which can be crafted back into a clay block or smelted into bricks. Clay blocks can also be smelted into hardened clay.
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. Some texture packs may also make them look different.