Azure only supports VHD files and it would need to be uploaded as a page blob before you can create a disk from the image.
I recommend to follow the procedures in the links below to prepare your VHD image, upload and create VM.
https://video2.skills-academy.com/en-us/azure/virtual-machines/windows/prepare-for-upload-vhd-image
https://video2.skills-academy.com/en-us/azure/virtual-machines/windows/upload-generalized-managed