The is a discrepancy found in Microsoft 365 SharePoint external sharing configuration.

Let say, a sharing policy is configured at tenant level that restricts external sharing with “New and existing guests” and limits external sharing by domain:

But that is not enough. A site collection must be allowed to be shared also:

And when we are configuring Site Collection Sharing settings – we are not able to set “Site content can be shared with” higher that tenant level. But “Limit sharing by domain” still can be configured On or OFF (remember at tenant level it is set to ON).

So technically it is possible to not to limit site collection sharing by domains.

Does that mean that external users from any domain can have access to this site?
No. They will get an error message “Something went wrong. The organization that owns this resource has a policy that prevents access from people in the domain you’re currently signed in to. If you think you should have access, please contact the person who sent you the link to this resource“

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