A clone is a game which closely copies the dynamic of another game, but not necessarily the content or branding. The majority of released games are arguably clones of others, especially in the social, web and mobile markets. A game which uses the dynamic of another but adds something significant of its own (for example: Puzzle Quest, Angry Birds) is not a clone.
Clones are permissable under law because game rules are not considered copyrightable (but are considered patentable in some circumstances), but the practise is generally looked down on. Student developers often clone others' games as learning exercises, but commercial developers and publishers do it because it's cheaper to treat another game as your design template than to create your own.
Clones usually fail to capture the same audience as the source game. In some markets this doesn't matter (for example: Facebook) where marketing muscle and visibility are far more important factors.