A lot of tango technique is focused on the foot and ankle, as well as on the hip joints. The knees have a much smaller role in tango, but it is still important to have good technique all the way up the leg!
Bend zee knees!
When I was a sweet young thing in Omar Vega's milonga classes at Torcuato Tasso, he used me to show moves. Between my bad Spanish and (apparently) bad technique, he could get really frustrated with me. "Bend your knees! More! More! Too much! Straighten your knees!!" I heard that every week until I figured out what he meant.
Let's look at the structure of the knee. Notice that nice, rounded surface where the bones meet? They are meant to roll/flex in a front-to-back movement with very little lateral motion.
The muscles that attach to the knee or run across the joint, move the knee. For efficiency, the muscles at the front and back of the knee must have some sort of balance of power. You can see that the hamstrings (back) and quadriceps (front) are the big muscles groups of the upper leg that need to be balanced.
The problem: weak knees
Most of us have weak hamstrings and gluteal muscles from sitting too much, so we rely more on our quads, and hold the flexion in our knees with too much muscle work. When that happens, the leader cannot feel the follower's feet very well (and vice versa): there is no connection to the ground energetically, and so the power of the move is reduced. In high heels, that pulls your forward onto your toes, and adds extra work and possible discomfort to your tango.
Fixes to the knee problem
Any exercises that build your gluteal muscles and your hamstrings will benefit you for tango. Check our your local trainers, physical therapists, exercise classes, etc. I have learned a lot of exercises from my chiropractor (who is also a physical trainer). I use my information to make sure that I am working correctly when I go to my Barre 3 classes.
Build your hamstrings and gluteal muscles, but in the meantime, try to balance your knee bones so that the BONES hold you up, and the muscles simply help. Not too flexed, not too straight, and constantly adjusting: that is the secret! It's not a "position" but a "range of motion" approach. Let there be some variation in your move. After all, the proprioceptors in your ankles are constantly adjusting for balance, and that needs to travel up through your knees and hips to your body. You can't hold a static shape that is right: everything constantly adjusts.
Extend your legs?
So the answer is: yes and no. A good tango step is a balance between too straight and too bent a knee and allows for efficient muscle use and balance. Too many dancers reach their legs out behind them as they take backward steps. This might look pretty, but it has no power, and the leader does not know where your feet went. Check out my videos if you'd like more about how I think you should move.