Using the napkin at formal occasions, as with much else associated with etiquette, should be a delicate affair. It is meant only to be dabbed at the lips and should not get dirty in the process. It might seem that the napkin is provided precisely so that it can help the diner clean up any mess that might occur during the course of the meal. Of course, this was its original use, (once the tablecloth itself ceased to be used as a napkin), and at an informal occasion such as a barbeque, it still performs this service. But the more formal the event, the more vestigial the presence of the napkin, because the purpose of nearly every aspect of table manners is to preserve cleanliness and proper appearance. If all other elements of the meal are going well, there will be no danger of smudging the linen.
As soon as you are seated, remove the napkin from your place setting, unfold it, and put it in your lap. At some very formal restaurants, the waiter may do this for the diners, but it is not inappropriate to place your own napkin in your lap, even when this is the case. If your napkin falls on the floor during a very formal event, do not retrieve it. You should be able to signal a member of the serving staff that you need a fresh one.
When you leave the table at the end of the meal, place your napkin loosely next to your plate. It should not be crumpled or twisted, which would reveal untidiness or nervousness, respectively; nor should it be folded, which might be seen as an implication that you think your hosts might reuse it without washing. The napkin must also not be left on the chair. There is a European superstition that a diner who leaves the napkin on his chair will never sit at that table again, but other, less supernatural, reasons are often cited for this: it might seem as if you have an inappropriately dirty napkin to hide — or even that you are trying to run off with the table linens.
Source is here.