Which versions of IE support PNG favicons?

The short answer:

IE11 is the first version of Internet Explorer to support the direct usage of .png and .gif file format favicons.

Why the confusion?

As you mentioned, some seem to have implied that .png favicons are supported in IE7+, while others have stated the opposite.

I believe the confusion is caused by the fact that .png images can be used inside .ico files (.ico files are just image container files after all) as of IE7, which is true .

However, previously, direct .png favicons were only ever compatible with the other major browsers (Chrome, Firefox etc).

Proof of direct .png Favicon compatibility in IE11 and beyond:

The File Format support section on the Favicon wikipedia page resembles the following:

[20] points to an article called Fun with Favicons written by Eric Law, an ex-Microsoft employee and 2013 Microsoft MVP.

The article includes the following:

IE11 shows some significant improvements in Favicon support:

• Favicons may be changed dynamically using script.
• The Favicon URL may point directly at a GIF file.
• The Favicon URL may point directly at a PNG file.

Note though, that it may not be the best idea to use direct .png favicons due to compatibility issues with older versions of IE, as mentioned by Eric in the same blog post:

“Of course, just because you can point at a .png or .gif doesn’t mean
you should– for both compatibility and experience reasons (remember
.ico can hold multiple image sizes to best suit the display context)
you should continue to use a .ico as your favicon.”

Another article written by Mr.Law, called IE11 Changes, also briefly mentions IE11’s support for direct .png and .gif file format favicons.

Proof of .png Favicon incompatibility in IE10 and before:

There are many official and non official sources proving that IE10 and before only support .ico Favicons.

As of 13/10/2013, the ‘file format support’ section of the Favicon Wikipedia page resembles the following:

A 2012 article on MSDN called How to Add a Shortcut Icon to a Web Page contains the following snippet:

“Note that shortcut icons in image formats other than .ico — for
instance, .bmp, .gif, or .png — cannot be displayed in Internet
Explorer.”

A few quotes from non-official sources:

“First, IE requires an actual icon file. Not just a jpg or png renamed
with an ico extension.” – Greg Hostetler, Setting up Favicons in IE7..

“It must be windows icon format instead of PNG or GiF, IE8 just
supports ICO.” – xyberbit, MSDN..

“On the other hand, Internet Explorer does not support PNG favicons,
but it will ignore the PNG favicon and use the ICO favicon, regardless
of the order in which they are declared.” – Jonathon T.Neal.

“One. Big. Problem. IE10 does not support conditional comments, and it
does not support PNG favicons.” – Jonathon T.Neal

Other queries answered:

Can I just re-name the filetype from .png to .ico and vice-versa to
get around this incompatibility issue?

Sadly not (tested by @Truerror on the 17/06/2013 in IE10). IE10 and before requires an actual icon (.ico) file.

Should it be an 16×16 .ico?

Here’s what Microsoft have to say about that:

“Consider creating both a 16×16-pixel icon as well as a 32×32-pixel
icon (and larger, bandwidth permitting), since on high-DPI displays,
Internet Explorer may stretch the icon to fit the available space.”