Waterleaf

Waterleaf was introduced in the 1.0.5 patch.

It appears as a very small, aqua-colored sprout. It grows in Desert Biomes (right in the Sand, no less) and can be cut with virtually any weapon or tool. You can also plant it in Clay Pots using Waterleaf Seeds.

Keep in mind as of 1.0.5 you can no longer harvest flowers or herbs out of Clay Pots with a standard bladed weapon; instead, use your Pickaxe and left-click on the flower or herb above the Clay Pot you wish to harvest out of.

Waterleaf is a finicky plant, and will only bloom if you can find a way to submerge it in water. Using Water Buckets and Clay Pots in an enclosed area is one option. When fully grown and watered, the appearance of Waterleaf will change, becoming larger and speckled with aqua leaves - see image above.

Harvesting it while it is blooming will drop 1-3 Waterleaf Seeds.

Waterleaf is a "higher tier" Herb (above Daybloom and Blinkroot, for instance) that is an ingredient in three alchemy Potions*:

Used in

 * You can see this listing in-game by placing Waterleaf in the Guide's Crafting menu.