A clone character is a character whose moveset is extremely similar, if not identical, to another's, despite (usually) a different appearance. In the original Street Fighter, for example, Ken and Ryu were clones. There is a tendency for clone characters to become more different with later versions of the game (for example, Ralf and Clark from KOF, Yun and Yang from Street Fighter 3rd Strike). A clone differs from a palette swap in that a different actual sprite or model is usually used, but the movelist is still the same. Palette swaps are simply differently-colored sprites (usually alternate costumes for 2D fighting game characters).
This term derives from the fighting style of Ryu and Ken from Street Fighter, incorrectly described as "Shotokan" in the English translation of the Street Fighter games. The style used by these characters is a fictional one with no name, however it can be described as an "Ansatsuken" ("assassinating fist") style, as it is designed to kill (Gen, a character with an extremely different style, is referred to as using an "Ansatsuken" style in Japanese game literature -- Ansatsuken is a description, not the name of any particular style).
In Street Fighter games, Shotokan Character (Shoto, Shotoclone) refers to a group of characters who employ a fighting style introduced with Ryu in the original Street Fighter, characterized by Shoryuken, Hadouken, and Tatsumaki (Hurricane Kick). The quintessential Shotos in the Street Fighter Series are Ryu, Ken, and Akuma. This term is also used in a broader sense to refer to characters that employ alterated but recognisable "Shotokan" styles. This group comprises Dan, Sean, Gouken, and Sakura.
Although used less commonly, an even broader definition of Shoto (Shoto Style) refers to any character or gameplay style that utilizes projectile moves similar to the Hadouken to keep opponents at a distance, and an anti-air attack similar to the Shoryuken to counter opponent jump-ins trying to get over the projectile. In Street Fighter, Sagat falls in this definition, since he has a fireball inputed by the quarter-circle-forward motion, and his tiger uppercut employs an input identical to the shoryuken's input and also functions similarly. Characters in other games, such as Morrigan can also fall within this definition.