First I tought that I made a mistake when creating my Icon, but I have also tried it with a copy the Default.ico from the Engine folder, and am getting the same error.
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Any Ideas?
I wonder if you are also using git integration? I had this same problem this morning. In order to get around it, I had to turn off source control integration. I was then able to set the icons. Of course, I manually tracked my icons in git and re-enabled source control integration right afterward!