"The folder you tried to unselect contains the windows documents folder, which is an important folder in windows and is currently pointed to Onedrive"

Folders that are not selected at "Choose folders" cannot download from the online OneDrive and sync to your PC. Certain folders that are checked cannot be unchecked since they are not allowed to be removed from your PC.

For some reason that I cannot explain, you can no longer uncheck any folders within the Desktop, Documents, Pictures, Music, and Videos folders. You must use the Files-On-Demand "Free up space" option to keep those files and folders from making local copies to your PC.

So in File Explorer right-click and select "Free up space" on folders that you cannot uncheck.

You can stop syncing your local folders to OneDrive at the OneDrive Settings > Sync and backup > Manage backup. But then you are not backing up these locations which is the whole idea of using OneDrive.

All folders have been selected by default - even when uninstalling and reinstalling Onedrive, I cannot uncheck any of the folders while configuring the initial sync. On my old machine, I was able to uncheck them prior to this issue, and thankfully, that setting has persisted, so those folders are not being synced. However, on my new machine, those are not grandfathered in and I am forced to download all, hence the issue presented.

I can't find anywhere in the contextual menu an option for "Free up space". I believe Files on Demand has been disabled by the org admin. Which is why I have been reliant upon the feature of selecting/deselecting folders.

Files on Demand is also missing from the advanced section of Sync and backup, as descibed in this doc

"The folder you tried to unselect contains the windows desktop/documents/pictures folder, which is an important folder in windows and is currently pointed to Onedrive"

Weird thing is the message is the wrong way around,

Yes, I agree.

Same issue - this is extremely concerning. Thankfully I have some spare space on my drive to move things around, but if I did not, I would be severly compromised, especially with the fact that my machine has restricted removable media.

I frequently move folders to online only since I no longer need them locally and rely upon this selective mechanism to free up space.

Posting here because I am also encountering this issue and it is extremely frustrating

I am having the same problem. Previously you could deselect a folder inside the documents folder. Because there are also software that uses folders inside documents, which I do not want to sync between devices as they take up too much space and I dont use the same software on every device.