A cliché is a phrase, an idea or an expression that has been overused. As standalone sentence there may be nothing wrong with it necessarily and obviously was once an effective evocation to have been used so many times. Most people understand what clichés mean, making them accessible and tempting to use. A universally understood metaphor which has become a cliché might add clarity but it shows a lack of creativity - why express something in a way that was used a 1000 times already instead of finding a new and innovative way to say it? Writers need to remember they are artists and art is about original expression and new points of view. It loses the point about being art when we just recycle an old idea or old expressions.
I suppose it's obvious why clichés are bad, but returning to the important question - how to avoid them? To be honest, I wish I had this answer. I got a short story I gave in for critique returned back to me with line after line underlined with the dreaded word cliché written above. I set about to research as much as I could to find out what defines a cliché and how to recognise them. There are many websites out there with lists of obvious clichés such as: http://suspense.net/whitefish/cliche.htm . Although I think the best way to tackle them is to read your own work with critical eye. Does something look familiar? Is that metaphor something you are proud of - well google it - how many hits does it get? Are you using something pre-packaged to say what you want or can you think of a more original way to express them?
Can clichés be used in dialogue or narration? We use them often in daily life and in conversation. Real life is riddled with clichés, so it would only add a sense of realism to a dialogue in fiction to use them. I think using the odd cliché here and there in dialogue can be excused, but still it's better to not over use them.
It's safest to question every metaphor, expression and idea you've used. But ultimately weeding out the cliché will take experience to recognise and shoot the buggers. I still expect to get back stories critiqued with the dreaded underlining and the word cliché written above it. I just hope it will be less and less as time goes on and soon I will become an expert cliché slayer.
Anyway as Salvador Dalí said: "The first man to compare the cheeks of a young woman to a rose was obviously a poet; the first to repeat it was possibly an idiot."