MacBook Air M2 freezes when connected to the DELL U3421WE

MacBook Air M2 randomly freezes when it is connected to connected via USB-C with the DELL U3421WE monitor. To be clear is not Kernel Panic. The system becomes randomly unresponsive. It’s happening while using MS Teams, Outlook or any application. When I unplug the USB-C cable macOS is working normally. Also, sometimes the system randomly lags for 2-3 seconds or the macOS login window appears. The DELL U3421WE display is connected via Ethernet, 2x USB cables for keyboard/mouse. I replaced all cables to no avail.

Is this a known issue? What can I do?

DELL U3421WE Firmware: M2B107
MacBook Air M2
macOS Montery 12.7.5