!!! SOLVED !!! Thank you leroy douglas.
After reading the thread I found a reply which talked about entering different "sessions" and I figured out that was meant was different user accounts.
BACKGROUND - For security reasons I have two accounts on my MacBook Air M1, one with Administrator privilege and one with just User privilege. I normally log into the User account, and when I updated to 26.3 it was from this account. Apparently I should have done so from the Administrator account.
SOLUTION - I logged out of User Account and logged into the Administrator Account. There was a slight delay as the Welcome to Tahoe screens appeared (apparently Tahoe 26.0 had been loaded but not actually installed in the Administrator account) and when I went to settings there were no fingerprints installed. I installed a fingerprint and enabled Touch ID for all functions. I logged out of Administrator account and logged into User Account (using password). I then locked screen and now Touch ID WORKS to unlock !!!.