DesktopX and IconX can use either type. Windows however can only use .ico files. It's is not the same format. PNG files are images compressed to a smaller filesize without loss in quality. Many people like then because of that and they can contain alpha-transparancy.
ico files actually can contain several images in one image. You can include different images for different sizes (usually 16x16, 32x32, 48x48, and so on) and different colour depth. Window will display a different image depending how you are viewing the files. If you are viewing them as a list you will see 16x16 pixels icons, normal ones in 32x32, tiles in 48x48.
If you run your monitor in 256 colours Windows will use the 256 colour icons, and 16.7million if you run in 16.7 million colours mode.
That is if the icon file contains all these variants. If the prefered variant Windows will take what it think is closest and use that instead. (After resizing and adjusting the colour depth.)
