We had the same issue trying to use an account with MFA disabled (it's a service account used for setting up gateways which require MFA disabled, but that's another story) but where the tenant conditional access policy says MFA is required.

To confirm this is your issue, go to Entra and look for the sign-in logs for the user: this will tell you whether MFA was used/required.

To resolve: add the service account to the exclusions within MS Entra | Conditional Access | Overview | Policies

https://learn.microsoft.com/en-us/entra/id-governance/conditional-access-exclusion