Outlook prompts for password and doesn’t use Modern Authentication to connect to Office 365

Symptoms

Consider the following scenarios.

Scenario 1:

Microsoft Outlook connects to your primary mailbox in an on-premises Exchange server by using RPC, and it also connects to another mailbox that’s located in Office 365.

Scenario 2:

You migrate your mailbox to Office 365 from an Exchange server that Outlook connects to by using RPC.

In these scenarios, you’re prompted for credentials, and Outlook doesn’t use Modern Authentication to connect to Office 365. After you enter your credentials, they’re transmitted to Office 365 instead of to a token.

Cause

Outlook limits its choices of authentication schemes to schemes that are supported by RPC. But the authentication schemes don’t include Modern Authentication.

Resolution

 Important

Follow the steps in this section carefully. Serious problems might occur if you modify the registry incorrectly. Before you modify it, back up the registry for restoration in case problems occur.

Create the following registry key to force Outlook to use a newer authentication method for web services, such as EWS and Autodiscover. We recommend that users force Outlook to use Modern Authentication.

1. Exit Outlook.
2. Start Registry Editor by using one of the following procedures, as appropriate for your version of Windows:
   • Windows 10, Windows 8.1, and Windows 8: Press Windows Key + R to open a Run dialog box. Type regedit.exe, and then press Enter.
   • Windows 7: Click Start, type regedit.exe in the search box, and then press Enter.
3. In Registry Editor, locate and click the following registry subkey : HKEY_CURRENT_USER\Software\Microsoft\Exchange
4. On the Edit menu, point to New, and then click DWORD Value.
5. Type AlwaysUseMSOAuthForAutoDiscover, and then press Enter.
6. Right-click AlwaysUseMSOAuthForAutoDiscover, and then click Modify.
7. In the Value data box, type 1, and then click OK.
8. Exit Registry Editor.

More information

If you’re running Office 2013, make sure that both Outlook and MSO are updated to the December 12, 2015 updates, or a later update release, before you use this registry key.

3114349 December 8, 2015, update for Outlook 2013 (KB3114349)

3114333 December 8, 2015, update for Office 2013 (KB3114333)

More information can be found here : Outlook prompts for password when Modern Authentication is enabled – Outlook | Microsoft Docs