Apologies for inconvenience on this, Acknowledged the issue is reproducible and product team is working towards fix, will update here accordingly.
Workaround suggested.
Use Azure CLI command to generate a token:
az staticwebapp hostname set -n MyStaticAppName --hostname example.com --validation-method "dns-txt-token"
Once executed, a TXT token will be generated. But the command will not complete until the validation complete.
You can retrieve the token via Azure portal > Static Web App > Custom Domain.
You can also retrieve the token with below Azure CLI command in a different command prompt:
az staticwebapp hostname show -n MyStaticAppName -g MyResourceGroup --hostname example.com --query "validationToken"
Please let us know if further query.