Usually in the pub, raising a glass to toast someone, or when you clink glasses with friends, like the German 'prost.'
Yep, like Adams861 said it is the exquivalent of "Cheers" when you clink your glasses together. (We don't use it as an alternative for "Diolch" though).
So it's not used for wishing someone actual good health like the German Gesundheit? Only as an equivalent to the German Prost?
Well no, it is for wishing someone good health, just not in the context of responding to someone sneezing.