Just ran into this problem myself, and then noticed in the Cursor
class documentation: "The Cursor class does not support animated
cursors (.ani files) or cursors with colors other than black and
white."  And after a few more attempts, I found that the Cursor class
also has problems with 16x16 monochrome images.  Finally got it to
work with a 32x32 monochrome image.

That does make me wonder, though, why Visual Studio .NET creates a
color cursor by default when adding a new cursor file :)

If you really want a color cursor, I know a partial solution.

First, we need to import a few Win32 calls:

[DllImport("user32.dll")]
public static extern IntPtr LoadCursorFromFile( string fileName );

[DllImport("user32.dll")]
public static extern IntPtr SetCursor( IntPtr cursorHandle );

[DllImport("user32.dll")]
public static extern uint DestroyCursor( IntPtr cursorHandle );

Loading the cursor is easy:

IntPtr cursorHandle = Win32.LoadCursorFromFile( "MyCursor.cur" );

Setting the cursor is more obnoxious, because it keeps wanting to
reset itself.  I tried catching the WM_SETCURSOR message by adding a
message filter (Application.AddMessageFilter), but that didn't work -
I never received the message.  Odd, because I received tons of other
messages - mouse moving, etc...

Eventually I just added an event handler to Application.Idle:

Application.Idle += new EventHandler( cursorIdle );
...
private void cursorIdle( object sender, System.EventArgs e )
{
   SetCursor( cursorHandle );
}

But this solution isn't perfect, because the cursor still flickers
back to the default pointer in some instances - such as when you click
a mouse button.  If someone has a way around the flicker, I'd love to
hear about it.

Ignore my previous message!  I think I found a way to do it... haven't
encountered any bad side effects (yet), and no flicker this time.

Create a black-and-white version of the cursor and load it normally:

Cursor myCursor = new Cursor( "MonochromeCursor.cur" );

Next, use platform invoke (as shown in previous message) to load the
color version:

IntPtr colorCursorHandle = LoadCursorFromFile( "ColorCursor.cur" );

...and then we use reflection to set myCursor's private "handle" field
:)

myCursor.GetType().InvokeMember(
   "handle",
   BindingFlags.Public | BindingFlags.NonPublic |
   BindingFlags.Instance | System.Reflection.BindingFlags.SetField,
   null,
   myCursor,
   new object [] { cursorHandle } );

Finally, set the form's cursor object:

form.Cursor = myCursor;