I could be wrong, but Im sure the dev team said that the textures did not have to be square, but the dimensions (width and height) both had to be a power of two because of the rendering algorithm - so you could have 256x512.
Could be wrong now, but thats how it was in the alpha days, and I do know that square textures reder faster anyways because the algorithm works best on squares rather than other polygons.
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