| I use the palm mute with pick sound all the time---in fact I've gotten work just because of my flatwound thumpy pick mute vibe (and then I try and sneak in some funky fingerstyle and the producer says, uh . .. please do that pick mute thing again . . . . ah well, if it aint broke . . .). Locking into a groove with a chunky pick/mute sound is one of the most gratifying things I find and sure can propel a track.
My method sounds similar to 22paul, but what happens with me is I end up with my pinky extended almost straight out and down across the strings while the pick is held between my first two fingers and the middle and ring finger loosely curled in underneath for a little support under the index and thumb--gives me a good angle. And of course the side of my palm is muting the strings too but the pinky is there for the higher strings as I move around. It looks a little goofy, like I'm holding a teacup at a snooty luncheon, but it feels natural and I can really vary the amount of mute easily.
Muting with the fretting hand is also a cool(but different) sound. I do it by fingering the note as I usually would but then very slightly touching the string with the next finger just in front of it, so right above the fret roughly. I think this is what Rocco does, and I've read that Joe Osborn did this too rather than palm mute, since he liked to pick with his hand resting on the front pickup cover, where palm muting wouldn't be an option. | 
