There are lots of ways of doing this; no one of them is best because sometimes one material/mix will be more suitable in one context, another for something else - Durham\'s Water Putty, Celluclay, spackle/patching compound, epoxy putties and various arcane mixtures have all been used by someone at some point.
Anyway probably the simplest way of doing this is to use a mix of paint, spackle and sifted sand and/or tiny stones (pick the grade as appropriate to the scale of what you\'re doing and the type of ground you\'re depicting). You can also add in a little white glue or acrylic medium.
Mix the paint and spackle together first, then add the dry ingredients and see what the consistency is like; adjust with a drop or two of water if necessary. The spackle isn\'t essential in this kind of mix so if you don\'t have any don\'t sweat it, but it helps it dry to a believable \'dry mud\' look.
This can be spread on with a variety of tools and painted on (crudely) with an old brush, especially if you make it a little thinner, allowing you to build up really believable mud encrustations.
Once it dries it can look pretty good all by itself but you\'ll often get better results by painting it a bit more - a few washes/glazes, some highlighting/drybrushing or whatever.
With a little variation this is how the groundwork/mud was done in all of these pieces in my gallery:
http://www.coolminiornot.com/86772
http://www.coolminiornot.com/86771
http://www.coolminiornot.com/86121
http://www.coolminiornot.com/86118
Einion