Hebrew block letters are square because they are derived from sacred writing that has rules against letters touching. These block letters are actually just one of several scripts or letter-forms used by modern Hebrew. The familiar block letters are also called Assyrian script and are mostly used by print publications.
The modern Hebrew block letters used in secular print texts are derived from Ashuri, also known as "square script." Ashuri is one of the scripts used in sacred writing. Because sacred Hebrew texts follow very strict rules concerning the legibility of individual letters and words, Hebrew calligraphy tends toward a square form to create greater consistency and prevent letters from touching one another. This is meant to prevent typos and to honor the sacred quality of the text.
Over many years, the modern letter forms of block script developed out of the most beautiful manuscript letter forms. In this way, the modern Assyrian script was developed.