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I have created a list and have added a Column of the type "Person or Group". I have limited this field to just look into a SharePoint group to get an option

options

When I go and add an item the People Picker shows users who are not in the SharePoint group defined. If I select them validation kicks in which is good.

Your organization's policies don't allow you to share with these users. Go to External Sharing in the Office 365 admin center to enable it.

Is there a way I can stop these other users from appearing in the People Picker?

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This is a default behavior in SharePoint online modern experience list forms.

I don't think there is any setting to avoid this behavior at the moment.

However, this works as expected in "classic experience". But I don't think moving again to the classic experience just because of this issue is good choice.

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