Pocket squares

Are there any rules about when to use pocket squares? I've been told they are way too formal for the office and should be kept to evenings out, with a dark suit or tux. Is that so?

I disagree.  I think pocket squares can be a great accessory, and need not be restricted to formal situations.  I often wear them to the office (2-3 times per week) even when nothing important is going on, and frequently to more important engagements (big meetings, courtroom appearances).  They look great to complement outfits that are somewhat dressier (i.e. spread collar, pinstripes), yet not truly formal.  

But I also wear them on less serious occasions, too-  a pocket square looks great, for example, as a way to add flair to a khaki suit worn with or without a tie.  For that matter, they can spruce up any suit worn without a tie (say, with a button-down shirt open at the neck, or perhaps a turtleneck).  I think they also look great with a navy or black blazer, even when worn over jeans.

Also, pocket squares can -and should- be varied as to materials (linen vs. silk) and colors (while white is probably most basic and useful, also try solid colors (like light blues), small patterns, and solid colors with trim (one of my favorites is a white with blue trimmed edges from Paul Stuart)).  That can add a tremendous amount of variety and versatility to your use of them.

GatorStyle is exactly correct. He stated everything so very well. I would add that a pocket square says "confidence", and sometimes, a dash of "fun". Note that the MSNBC news anchor, Brian Williams, always wears a crisp white pocket square. On the coverage of the Queen Mum's funeral, I noticed that all the men in the royal family wore pocket squares, including Princes William and Harry. A pocket square enhances a great shirt and tie. The design of the square should never be the same as the tie.