Flex Consumption function deployment in Azure no longer works

Type: Bug

Most recent failure was while following the steps:
1. Open the Command Palette (F1 or Ctrl+Shift+P / Cmd+Shift+P).
2.Search for and select Azure Functions: Create Function App in Azure... (Advanced).
3.When prompted for the resource authentication type, make sure to explicitly select Managed Identity instead of a Connection String.

From my Python function project in Visual Studio Code (which I have deployed successfully at least twice), when I 'F1' and chose any of the "Azure Functions: *[create|deploy]*" options, deployment ends with the error:
"Key based authentication is not permitted on this storage account" at the function creation step. This is on the sotrage account created by the Visual Studio Code installation process, and after the "Storage Blob Data Contributor" role has been assigned to the managed identity created by the Visual Studio Code installation process.

Output:
```
11:21:37 AM: Cache miss for provider locations (key: "daf07810-50ba-49ba-9e54-836ad861f35c|microsoft.managedidentity|userassignedidentities"). Fetching from API...
11:21:37 AM: Fetched and cached 51 locations for provider "Microsoft.ManagedIdentity/userAssignedIdentities".
11:22:06 AM: Verified resource group with name "c360core0pirl0ingest" is available for creation.
11:22:08 AM: Successfully created resource group "c360core0pirl0ingest".
11:22:08 AM: Creating user-assigned identity "c360core0pirl0ingest-identities-619cb5"...
11:22:10 AM: Successfully created user-assigned identity "c360core0pirl0ingest-identities-619cb5".
11:22:15 AM: Successfully created app service plan "FLEX-c360core0pirl0ingest-3f52".
11:22:15 AM: Creating storage account "c360core0pirl0ingest" with sku "Standard_LRS"...
11:22:40 AM: Successfully created storage account "c360core0pirl0ingest" with sku "Standard_LRS".
11:22:42 AM: Verifying that Application Insights is available for this location...
11:22:45 AM: Successfully created application insights "c360core0pirl0ingest".
11:22:45 AM: Creating role assignment "Storage Blob Data Contributor" for the storageAccounts resource "c360core0pirl0ingest"...
11:22:50 AM: Successfully created role assignment "Storage Blob Data Contributor" for the storageAccounts resource "c360core0pirl0ingest".
11:22:50 AM: Creating function app "c360core0pirl0ingest"...
11:23:13 AM: Failed to create function app "c360core0pirl0ingest".
11:23:13 AM: Error: Key based authentication is not permitted on this storage account.
```

VS Code version: Code 1.135.0 (Universal) (08d4889f9ec4a1685d257b9b95de036c8e1ce1e5, 2026-08-25T14:26:52Z)
OS version: Darwin arm64 25.6.0
Modes:

System Info

|Item|Value|
|---|---|
|CPUs|Apple M4 Max (16 x 2400)|
|GPU Status|2d_canvas: enabled
GPU0: VENDOR= 0x106b [Google Inc. (Apple)], DEVICE=0x0000 [ANGLE (Apple, ANGLE Metal Renderer: Apple M4 Max, Version 26.6.2 (Build 25G83))], DRIVER_VENDOR=Apple, DRIVER_VERSION=26.6.2 *ACTIVE*
Machine model name: Mac
Machine model version: 16.5
direct_rendering_display_compositor: disabled_off_ok
gpu_compositing: enabled
multiple_raster_threads: enabled_on
opengl: enabled_on
rasterization: enabled
raw_draw: disabled_off_ok
skia_graphite: enabled_on
trees_in_viz: disabled_off
video_decode: enabled
video_encode: enabled
webgl: enabled
webgpu: enabled
webnn: disabled_off|
|Load (avg)|2, 2, 1|
|Memory (System)|64.00GB (15.77GB free)|
|Process Argv|--crash-reporter-id afe13478-b157-40cb-bd1d-6cf0781ce4f3|
|Screen Reader|no|
|VM|0%|
Extensions (21)

Name|Identifier|Author|Version
---|---|---|---
Angular Language Service|angular.ng-template|Angular|22.1.0
Protobuf VSC|drblury.protobuf-vsc|DrBlury|1.6.9
Azure Load Testing|ms-azure-load-testing.microsoft-testing|ms-azure-load-testing|0.2.0
Azure Developer CLI|ms-azuretools.azure-dev|ms-azuretools|0.10.0
GitHub Copilot for Azure|ms-azuretools.vscode-azure-github-copilot|ms-azuretools|1.0.231
Azure MCP Server|ms-azuretools.vscode-azure-mcp-server|ms-azuretools|2.0.46
Azure App Service|ms-azuretools.vscode-azureappservice|ms-azuretools|0.27.0
Azure Container Apps|ms-azuretools.vscode-azurecontainerapps|ms-azuretools|0.11.2
Azure Functions|ms-azuretools.vscode-azurefunctions|ms-azuretools|1.22.1
Azure Resources|ms-azuretools.vscode-azureresourcegroups|ms-azuretools|0.12.7
Azure Static Web Apps|ms-azuretools.vscode-azurestaticwebapps|ms-azuretools|0.13.3
Azure Storage|ms-azuretools.vscode-azurestorage|ms-azuretools|0.17.2
Azure Virtual Machines|ms-azuretools.vscode-azurevirtualmachines|ms-azuretools|0.6.11
Azure Cosmos DB|ms-azuretools.vscode-cosmosdb|ms-azuretools|0.36.2
Python Debugger|ms-python.debugpy|ms-python|2026.6.0
Python|ms-python.python|ms-python|2026.4.0
Pylance|ms-python.vscode-pylance|ms-python|2026.3.1
Python Environments|ms-python.vscode-python-envs|ms-python|1.36.0
Azure Tools|ms-vscode.vscode-node-azure-pack|ms-vscode|1.8.2
Foundry Toolkit for VS Code|ms-windows-ai-studio.windows-ai-studio|ms-windows-ai-studio|1.6.10
Microsoft Foundry|teamsdevapp.vscode-ai-foundry|TeamsDevApp|1.2.4

A/B Experiments

```
vsliv368cf:30146710
binariesv615:30325510
f8hc8238:30694864
nativeloc1:31344060
dwcopilot:31170013
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e5gg6876:31282496
pythonrdcb7:31342333
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gh487529:31544284
cloudbuttont:31379625
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conptydll_true:31498968
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control_6dc23131:31555649
ei9d7968:31496641
chat:31457767
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h08i8180_copy:31475368
ddid_t:31478206
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cp_cls_t_1082:31535311
logging_enabled_new:31498466
db5d2638:31499441
jb_cp_cls_t_632:31543129
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a1ije391_t:31540920
jbcp_cls_pctr_t:31531130
61138546:31518536
cp_intellij_t_nes:31548657
gf14b233:31526830
ahp-both-windows:31556933
session_8:31532895
ihg5j128:31534457
f412h606:31551416
7g2b5551:31542111
sandbox-ui-on-2:31543161
nes-ex-cf-euporie-03:31542868
enable_editor_pane_layout:31569726
allow-none:31555437
ac562147:31564510
c7c27ce7:31554789
1h923230:31564177
0dg73464:31554319
treatment-23-1:31555779
unuse_dynamic_mcp:31555281
0d8dfbc3:31570291
nemo-v2:31565334
0c1h4866:31566224
session-archive:31558132
5b8j3302:31564601
mangle-name-control:31572633
lunaclean:31573760
permission_prompt_control:1332567
ccr_pr_nudge_control:1319470
vsc_wsm_c:1340633
eh853263:1355661

```