Why are you absolutely convinced the government requesting a contractor (Palantir) no longer use a technology they've determined to be unsuitable for their needs would be "extremely illegal", yet demanding every single company engaged in government contracts can no longer use Anthropic for any use whatsoever is totally fine?

I cannot follow the logic there at all. It's like being concerned that asking your neighbor to move their car would be too rude so your solution is to bulldoze their entire driveway. A federal judge evidently disagrees with your legal theory here so perhaps you're off the mark (in fact they specifically call out that the DoD failed to attempt less drastic remedies in violation of the law behind the designation):

  Defendants’ designation of Anthropic as a “supply chain risk” is likely both contrary to law and arbitrary and capricious. The Department of War provides no legitimate basis to infer from Anthropic’s forthright insistence on usage restrictions that it might become a saboteur.

  There are other serious procedural problems with the government’s actions.    Anthropic had no notice or opportunity to respond, which likely violated its due process rights. And the Department of War flouted procedural safeguards required by Congress before entering the supply chain risk designation, including that it consider less intrusive measures.