I was able to solve this by following the below steps. Instead of trying to make a new connection from Studio- I have created a new connection from Orchestrator and it worked as expected.
Login to orchestrator
Navigate to Integration Services
Select the folder from the left panel
Search for Gen Ai Activities
Select the tile UiPath GenAi Activities
Click on Connect to UiPath GenAi Activities
Make a new connection by continuing the steps
Note the connection name
Delete the existing connections
Now open the studio and create a new project or existing project
Refresh the details
While making connection in GenAi activity, make sure the newly created connection is selected
Debug and it worked fine for me
