You can use the Dunford-Taylor-Cauchy integral formula to define the square root of a matrix:
$$
\sqrt{X} = \frac{1}{2\pi i } \oint_\Gamma \sqrt{z} \frac{dz}{z-X}
$$
where $\Gamma$ is a closed curve that encircles all the eigenvalues of $X$ in anticlockwise direction. This curve can be taken far away from the eigenvalues such that it is un-affected by the perturbation (when computing the derivative).
Furthermore use
$$
\frac{d}{dt} \frac{1}{z-X} = \frac{1}{z-X} X' \frac{1}{z-X},
$$
(prime indicates differentiation wrt to $t$). All in all we get
$$
\frac{d}{dt} \sqrt{X} = \frac{1}{2\pi i } \oint_\Gamma \sqrt{z} dz \frac{1}{z-X} X' \frac{1}{z-X}.\ \ \ \ \ (1)
$$
A convenient expression can be obtained going to the spectral representation of $X$:
$$
X = \sum_n \lambda_n P_n \ \ \ \ \ (2)
$$
with $\lambda_n, P_n$ respectively eigenvalues, eigenprojectors.
Plugging it into (1) and evaluating the residues we get
\begin{align}
\frac{d}{dt} \sqrt{X} &= \sum_n \frac{1}{2\sqrt{\lambda_n}} P_n X' P_n \\
& + \sum_{n\neq m} \frac{\sqrt{\lambda_n}-\sqrt{\lambda_m} }{\lambda_n - \lambda_m} P_n X' P_m \ \ \ (3)
\end{align}
Apparently Eq. (3) is not valid if one of the eigenvalues is zero, pretty much as in @greg's answer. However, looking carefully at the residues one realizes that if there is a $\lambda_{n'}=0$ term that residue is zero. In other words, simply remove $n'$ from the first sum in (3).
With these tweaks Eq. (3) is valid in full generality.