Dawn was originally a glowing ball of energy know as 'The Key' which had the power to open the doors between dimensions. When Glory comes searching for 'The Key' the monks who are acting as its' guardians magically combine it with Buffy's blood, transforming it into Buffy's sister and reworking everyone's memories so that for all intents and purposes she's always been there. So Dawn is technically Buffy's clone but the process introduced enough variation so that she is not an exact double, she's more like Buffy's non-identical twin and a blood relation to Buffy, Hank and Joyce, containing DNA from all three. There are various hints throughout the series however that Buffy and Dawn are much closer than just sisters Buffy saying that their relationship is 'physical' and that Dawn feels as though she's 'part of me'.