CloudShell - CloudShell in Windows Terminal Exiting

Windows Terminal version

1.21.2361.0

Windows build number

Windows 11 Version 23H2 (OS Build 22631.3380)

Other Software

No response

Steps to reproduce

Impact: Customers are unable to launch Azure Cloud Shell from Windows Terminal, hindering the release of Windows Terminal to customers.
Customers are experiencing an error when attempting to launch Azure Cloud Shell from Windows Terminal. . It fails with this error:
[process exited with code 1 (0x00000001)]

Lab repro:

Deployed CloudShell integrated with Vnet same as customer: Deploy Azure Cloud Shell in a virtual network with quickstart templates | Microsoft Learn

Test 1: Filled all details in the onboarding UX:

We can successfully reproduce the error when Portal cloudshell is either stuck here:

or it has timed out after 20 mins

In either of the above conditions, we get the same error in Terminal:

Test 2:

Connected to cloudshell portal, then connected cloudshell terminal, both worked well.

Left cloudshell portal idle for about 6 hours.

Session on cloudshell Windows terminal ended after a while which, I assume, is expected.

Launched a new cloudshell terminal session without touching cloudshell in portal. Got the same error as customer.

Workaround: As long as portal cloudshell is not left idle to timeout, customer as well as we can successfully launch terminal cloudshell as well. If we return to portal cloudshell and relaunch it, then windows terminal cloudshell starts successfully.

Expected Behavior

Cloudshell in Windows terminal should launch

Actual Behavior

Customer is trying to launch Azure Cloud Shell from Windows Terminal. It fails with this error:
"Requesting a cloud shell instance...Succeeded.Requesting a terminal (this might take a while)...[process exited with code 1 (0x00000001)]
"