Hi @SR VSP ,
Could internal users in "MS-SP-SecuirtyGroup" access to that folder normally?
I reproduced your issue in my environment. Per my test, I solved this issue by following the below steps:
Go to Site Settings -> Site Collection Administration -> Site collection features -> Deactivate Limited-access user permission lockdown mode:
For more information, please refer to this article: Users can't access a shared folder in SharePoint Online
==========Update==========
I tried to reproduce your issue again by the below instruction step by step.
I created a brand new site collection. It didn’t activate “Limited-access user permission lockdown mode” feature, of course.
My security group with both internal and external users in it:
There was a “foder1” in a document library and managed access to it:
Both the internal users and external users can access the folder via the following URL:
https://<tenantname>.sharepoint.com/sites/<sitename>/<libraryname>
If the users choose the site’s URL, they will get an access denied page, as they only have folder-level access rights.
So, please make sure the problematic users are accessing the library’s URL, not the site’s URL.
I hope this information has been useful, please let me know if you still need assistance.
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