Ok, this is resolved by downloading latest version of Xcode and flutter. With latest flutter and Xcode, android studio uses live Xcode Automation to run app via Xcode while debugging in Android Studio.

Its been a month and no reply to this. Please let me know how you solved it? I had very smooth setup of iOS 16.6.1 device and Xcode untill i got Xcode 15.0 Release and iOS 17.0 on same day. Now only iOS 17 emulator works and 100% same situation happens as u described. i.e. Greyed out "Connect via Network" and its already ticked. There is a work around but it only works on Xcode not on android studio. So there is no way for me to debug the app.