Hoping you can give me some things to try, I'm probably doing something wrong? This worked for a couple weeks, then just stopped connecting after recent windows update. This is a custom kernel, but I haven't had problems with it on anything but vs code. When I use the debug address from bash/wsl I get 6849775440496504e0677ffcf2a46d47ad9130f5. Strangely from windows I can connect to that debug address as localhost, but not as 127.0.0.1. Both localhost and 127.0.0.1 work from ubuntu. Thanks, visual studio code is great.
I am also getting this on WSL2
For me the problem was that the folder %userprofile%\.vscode\extensions\ms-vscode-remote.remote-wsl-0.44.2 was locked bywslhost, so VS Code won't be able to delete the folder and reinstall remote-wsl.
Qutting VS code, killing wsl host and deleting the folder allowed me to reinstall remote-wsl.
That didn't work for me. I also was using Clear Linux on WSL2 if that makes a difference.
I am also getting this on WSL2
what should I do?

Aware of incompatible changes in WSL 2 release since 20151! I Only Distros installed after upgrade started for me smoothly. All others required some manipulations like re-install. It works! It only starts differently! WSL does some things once, during 1st distro start. There is no automatic dependents upgrade.
Aware of incompatible changes in WSL 2 release since 20151! I Only Distros installed after upgrade started for me smoothly. All others required some manipulations like re-install. It works! It only starts differently! WSL does some things once, during 1st distro start. There is no automatic dependents upgrade.
thank you. Yes, I was able to find the problem and fix it.
Cannot install any extensions due to XHR failure? (At least I could install the WSL Remote Extension manually)
Two rules in Defender Firewall were blocking access. Guess a telemetry blocking script I forget I had installed is now begging for attention 馃槮
telemetry_cs1.wpc.v0cdn.net
telemetry_az361816.vo.msecnd.net
Note: It is not about being tracked. I use my smartphone as router with unlimited data plan but still like to minimize traffic because a 5GB day limit with free SMS upgrades which are annoying, so I like to keep my daily traffic below the 5GB limit.
Looking at the logs in the original description, WSL2 is detected but in the end we try to connect it as WSL1.
There has been fixes for that in 0.44.4.
@imoldfella Do you still see the issue?
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Happy Coding!
Most helpful comment
For me the problem was that the folder
%userprofile%\.vscode\extensions\ms-vscode-remote.remote-wsl-0.44.2was locked bywslhost, so VS Code won't be able to delete the folder and reinstall remote-wsl.Qutting VS code, killing wsl host and deleting the folder allowed me to reinstall remote-wsl.