What exactly happens when you choose Sign in with a MS Account Instead?
The new account is using the old MS Account folder, the name does not change on the folder when you change to a Local Account even though you are asked to give it a new name - it only is for the account, not the folder.
It seems the new Local Account is corrupted, too, if it cannot convert to a MS Account.
You may need to do a Clean Install: https://www.windowscentral.com/how-do-clean-ins...
One last thing you can do is back up your files, enable the build in hidden Administrator account used for emergencies, sign into it to delete all accounts including the User folder.
Restart Windows and then try adding the MS Account in Settings > Accounts > Family & Other Users > Other Users.
Let me know what happens.