Could/Should I cite a paper that I am refereeing?

Reviewers obligations in general include respecting the confidentiality of peer review and not revealing any details of a manuscript or related communications, during or after the peer review process. Detailed for example in the COPE Ethical Guidelines for Peer Reviewers.

That said, by citing a confidential manuscript you reveal the title, potentially giving away a scientific message, and the authors, disclosing the fact they are working on a specific research question.

You can however cite a different version of the work in case it was previously published on a preprint server for example.

You should not cite unpublished work that you discover during peer-review, because the reviewing process is confidential and citing such work violates confidentiality. There's an exception when such works are publicly available (e.g., as preprints), in which case they can be cited (without harming confidentiality).