Thats an issue since 1.20, i guess.
So if you want to drop something out of your inventory with holding square it will work.
BUT: If you drop your clothes or whatever (also chests and other containers) on the ground. And if you want to drop something out of these clothes/containers while theyre on the ground it wont work with holding square. 2 years ago it worked but it broke somewhen.
Drop your jacket or another container which contains a item to the ground. Then try to drop this item out of the jacket/container with holding square on PS. Wont work.
This is as designed due to fix for another issue.
"'Drop' functionality disconnected in vicinity due to keybinding conflict. The available 'hold' action should be 'take to hands' instead, if applicable with the item in question."