There are 2 different considerations here.
Normally in problem calculations in physics, we are given numbers to put into equations and calculate answers. The general advice given is as you say. Give the answer to the least number of significant figures in the data supplied. The data supplied, on the other hand, should be consistent. The value in your example should (would?) be stated as 4.0m
On the other hand, we also use values measured in experiments to calculate something else using a formula, possibly. Here the treatment is different.
It's contradictory if the value of 4m you "obtained" for the length was only certain to ±1m
As it is written it's a bit ambiguous. Having said that, if you want to carry through your calculation, you could say that the value of 4±1 has a 25% uncertainty. [± 1 in 4]
When you square it you increase the uncertainty to 50%
Your final value of 16 could be quoted as having a 50% uncertainty, that is, ±8
16±8m²
You can look at it another way:
If the initial value is 4±1m then it could possibly be 3m or 5m
3x3 is 9 and 5x5 is 25
So your result could be anywhere between 9m² and 25m². This is almost the same result as using the percentages.
The lesson is, if you want your answer of 16, you need to express the value of 4 to a suitable degree of certainty.
PS On the other hand, if you're a mathematician and dealing only with integers, there is no problem. 4²=16 every time!