Here the official response from MS dated Feb.2:
https://support.microsoft.com/en-us/office/outlook-and-other-apps-are-unable-to-connect-to-outlook-com-f4202ebf-89c6-4a8a-bec3-3d60cf7deaef
STATUS: MITIGATING
The Outlook.com Team implemented service changes on January 31, 2024 to address the connection issues with unexpected authentication prompts. Although this addressed a lot of the issues we are still seeing reports of password prompts. The Outlook.com Team continues to address the issues as we work through the reports and feedback. We will continue to work this issue until the issue is resolved.
For Outlook 2013 and Outlook 2016, if you are still seeing authentication prompts, please ensure you've enabled two step verification and create an app password. Use the app password in place of your normal password when Outlook prompts for authentication. For more information, see Using app passwords with apps that don't support two-step verification.
Well, I can never connect to Hotmail on an Exchange Connection. Switching to IMAP/SMTP, I can only connect with a regular password, never with an app password as requested.
On Outlook.com, I can connect to the Exchanger Server, but with a regular password only, never with an App Password.
Switching between various options is very time-consuming. MS QC starts to look very similar to the end of the Ballmer's era. Last 2 months Windows updates started to be buggy, and now this, especially the time it takes to resolve... The MS link above displayed "STATUS: RESOLVED" yesterday!
I will stop making changes and wait for the problem to be resolved, not patched.