@Amit Thank you for reaching out!
Check the logs in "C:\Program Files\Microsoft Azure Recovery Services Agent\Temp" and find reference to disk space looking at local path "C:\Program Files\Microsoft Azure Recovery Services Agent\Scratch". This is the temp holding spot for backup before it gets synced to Azure. If scratch folder volume is low on disk space, you might want to increase the disk space or move the scratch folder to a different volume. Reference link - https://learn.microsoft.com/en-us/azure/backup/backup-azure-file-folder-backup-faq#how-to-check-if-scratch-folder-is-valid-and-accessible-
Another thing, you might want to check is "Shadow copies" being low on space. If so, .increase that or remove old shadow copies.
Hope this helps!
----------------------------------------------------------------------------------------------------------------------
If the response helped, do "Accept Answer" and up-vote it