Hello Kostas, this is Arlene, an Independent Advisor. Thanks for the detailed follow-up this definitely helps narrow things down.
Regarding the error 0x8007017C, it typically appears when Windows cannot access online-only files due to an issue with the Windows Cloud Files Filter Driver (cldflt.sys) a system component OneDrive relies on for Files On-Demand.
A few things to try that often resolve this issue:
Re-enable the Cloud Files Filter Driver:
Open Command Prompt as Administrator.
Type:
reg add "HKLM\System\CurrentControlSet\Services\CldFlt" /v Start /t REG_DWORD /d 2 /f
Then restart your computer.
Ensure OneDrive sync is properly linked to your signed-in Windows account try signing out and back into OneDrive if necessary.
Since you're seeing only the options "Free up disk space" and "Download all files," the new Files On-Demand UI seems to have streamlined older toggles which might require a full download as a workaround for now.
Let me know if you're comfortable trying the registry command above. Happy to guide you further!
Regards,
Arlene D.