Appraisal requirements were initially set by the Uniform Standards of Professional Appraisal Practice, under the direction of the U.S. Congress. States typically adopt those standards, and often times even exceed those standards. But the real issue is not so much your specific states requirements, rather, the issue is what the lender's underwriting department is going to accept as the appraised value.
Prior to the current debacle in the mortage industry, some underwriters overlooked comps that were foreclosures, or even sent the appraisal back to the appraiser to be reworked with better comps to justify the sale price. These days, it is more as it should be. That is, what prior sales best represent the value in the market for the home currently being appraised. If foreclosures are prevalent, then they must be considered.
There are no hard and fast rules, common sense should rule. Certainly, distressed properties include foreclosures, but they also include properties in poor condition. Appraisals must be done with "like" properties, that includes conditions of the property, conditions of the sale, conditions of the neighborhood, etc.
There is no rule, at least none that I have ever seen, where foreclosures cannot be used in an appraisal.