Very peculiar. I can confirm that I am able to set up any Exchange Online 1 account in ANY non-Microsoft app, for example emClient. JUST NOT the "new Outlook for Windows".
In the Exchange Admin Centre, when I go to "Manage settings for email apps" for the user, everything is enabled:

Curiously, I also tried setting up this account in the default "Mail" app in Windows 10 & 11, and it ALSO doesn't work there.
Also, when I check if the "new Outlook for Windows" is enabled for my Exchange Online 1 user in PowerShell, the status as "true". So from the above it's clear that Outlook for Desktop is still definitely "permitted" and "supported", in theory. Hopefully Microsoft is working to add the "new Outlook" here.