Translation:On the square, the children are playing in all kinds of clothing.
My answer was not accepted: The children are playing on the square in all kinds of clothes.
"Children wearing all kinds of clothes are playing on the square" is much more natural IMO
"In the square" is grammatically correct in English in this circumstance, referring to the place in a town. "On the square" refers to something that's on a geometric shape.
Just to make sure: this means that the children are wearing all kinds of clothes, not that there's a pile of all kinds of clothes and the children play in it?