I’ve categorized this as a bug, but I’m not entirely sure that is justified. I does seem to be a recent behavior change.
The presence of sfdx-project.json in the project root directory when a project is opened appears to determine the type of connections available to be selected as the configured connection for the module. That’s a bit of a pain since sfdx-project.json is always a part of the repo we use. Connections available in the ‘Open Connection’ dropdown are unaffected.
This is a fairly easy issue to work around, since all I need to do is temporarily rename sfdx-project.json and re-open the project to get around the issue, so I’m not sure it is worth the effort to address. Still, I thought it might be useful to note that it is an incorrect assumption that all projects with sfdx-project.json in the root directory only want to have dx connections available for module configuration.