That depends if your using ON THE FLY watermarking or GD2 as your image processor for permanent watermarking yes if your using permanent watermark and imagemagick it needs to be a gif.
If you have an issue please post an error as to what you mean by it doesnt work.
If your trying to use on the fly watermarking in Admin => Image Protection Options you turn on the options to use the watermark.php script to serve images and the option to overlay the image with an overlay option and input the full server path to the png image where asked.
If your trying to use PERMANENT watermarking then in Admin => Watermark Options you turn on the option to overlay the watermark on images and fill out the full server path to the image. You then fill out in Admin => edit categories the permissions of which usergroups get watermarked their images