I'm also trying to make some hands in the game engine, and I thought it would be really cool if they had something to do. So I say, "Hey! clay is fun!" but I can't figure out how to make the physics for clay in the game engine. All it does when I do soft-body for a cube is make it really bouncy. That's cool and all, but I want to make clay that I can squish the daylights out of with my bare-digital hands. Help?
It looks like you can use soft body physics for this. However, you'll need to lower the Shape Match threshold. (If you turn it off entirely, your shape will just crumple.)
You'll also need to subdivide your cube a lot, if you haven't already done so. If you're using a modifier for this, you'll need to apply it.