"Unable to sign in. Try again or create an app password for this account." when adding icloud account to Outlook 365

does your wife uses 2-Step Verification is not set up for her icloud apple account?

it may not be accepted due to lack of security issues?

Create & use App Passwords

If you use 2-Step-Verification and get a "password incorrect" error when you sign in, you can try to use an App Password.

1. Go to your Google Account.
2. Select Security.
3. Under "Signing in to Google," select App Passwords. You may need to sign in. If you don’t have this option, it might be because:
   1. 2-Step Verification is not set up for your account.
   2. 2-Step Verification is only set up for security keys.
   3. Your account is through work, school, or other organization.
   4. You turned on Advanced Protection.
4. At the bottom, choose Select app and choose the app you using  Select device and choose the device you’re using  Generate.
5. Follow the instructions to enter the App Password. The App Password is the 16-character code in the yellow bar on your device.
6. Tap Done.

Tip: Most of the time, you’ll only have to enter an App Password once per app or device, so don’t worry about memorizing it.

Are you creating an app password with iCloud or Microsoft 365? You should try creating the app password with Microsoft 365.