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How does your NSG rules look inbound and outbound for the subnet that your AVD session hosts are attached to? it's attached to AZ firewall. if i connect to VPN and then launch rdp i can connect to the session host. If i connect to vpn and launch remote desktop connection from remote desktop app or browser it shows error still. If it were issue with nsg then i would not be able to connect using rdp.

Also like Kidd_lp mentions, it is worth validating it is not a conditional access policy blocking your access to the backend services. The account is excluded from CA.

Are you trying to connect to an avd session host or are you trying to use mstsc to connect to an other Azurevm? the session host is essentially a jumpbox. Open remote desktop app, click the remote desktop connection icon and then it should just launch mstsc on the session host for me to connect to another vm.

all other suggestions from Kidd_lp i already did before logging this case.