The MS document does specify it, but is not obvious. This should work - incoming server to outlook.office365.com, port 993, SSLTLS and Oauth2 - assuming IMAP - outgoing server to smtp.office365.com, port 587, STARTTLS and Oauth2

If you cannot set Oauth2, try closing and restarting thunderbird.

Yes - I set all those parameters, but I could not get the Outgoing SMTP setup to offer me the Oauth2 choice. I am using Hotmail.co.uk rather than Hotmail.com - perhaps that is a problem.

As others have found the only solution is to delete the Thunderbird Hotmail account (NOT the source Microsoft account) , but not the data. This is deliberately difficult to find. Highlight the account name in the left hand panel and choose 'Account Settings' top right. Bottom left will be 'Account Options' with a drop down arrow. The items below this are NOT the drop down - select 'Account Options' and you get a menu including 'Remove Account', select this and you get the option to remove the account and separately the data - just select 'Remove', do NOT select 'Data'. The effect is instant.

Now re-create the account as you initially did a long time ago - 'Choose what to set up'- 'Email' etc The parameters are automatically set to what you need - apparently just the same as instructed - but something must be different.

If you have a lot of emails (I have several thousand) it takes a very long time to download all the headers - several hours.

I know this is drastic, but you are not modifying the source data, and if you keep your head it works.