I just tested and I was able to use the same format in my ARM template to launch a Linux VM. I believe it is possible there is an actual issue with the ssh key format or some extra whitespace or characters were pasted. Are you able to launch VMs in the portal using this same key?
You can check here on how to generate and properly format the key.
https://learn.microsoft.com/en-us/azure/virtual-machines/linux/create-ssh-keys-detailed#provide-ssh-public-key-when-deploying-a-vm
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