Azure SQL Database does support federated authentication. This allows you to use Microsoft Entra (formerly Azure Active Directory) credentials from a federated domain for authentication. It’s part of the hybrid identity solutions provided by Microsoft Entra, which also includes cloud authentication, pass-through authentication, and password hash authentication.
Federated authentication is supported and can be used with SQL Server Management Studio (SSMS) and SQL Server Data Tools (SSDT) for strong authentication, including multifactor authentication options. To support Windows single sign-on credentials, you can use Microsoft Entra credentials from a federated or managed domain that is configured for seamless single sign-on.
As you received an error message, it's important to ensure that the federated authentication is correctly set up and that the Azure SQL Server is configured to accept tokens from the federated domain. You need to review the trust relationships between the domains and the Azure SQL Database and ensure that the necessary permissions are granted to the managed identity and service principal involved in the configuration.
Reference
https://learn.microsoft.com/en-us/azure/azure-sql/database/authentication-aad-overview?view=azuresql#overview
https://learn.microsoft.com/en-us/azure/data-factory/connector-azure-sql-database?tabs=data-factory#linked-service-properties
I hope these steps help you resolve the issue. Let me know if you have any further questions