I used whetstones all the time in the 3rd game, but I have two in my inventory right now and unable to use them. Still pretty early into the game, but get a message "You are unable to use this at this time" when attempting to use them from the items menu or equipped as the current item. Anyone know what's up with this???
I would only reccoment using them during battle, or when you don't have access to the Smith, as all they do is restore durability points this time around. Repairing your weapon at the Smith is a lot cheaper that buying whetshones.
That being said, you can only use a Whetstone with your weapon drawn. When it isn't, you get the error message you are currently getting.