Issue with material3:1.1.0-alpha08
Please check the attached gif.
Note that there is also an issue when you set setDecorFitsSystemWindows to false, please see comment below in the code. If you do, the screen will get frozen. I believe that happens because an invisible overlay remains on the screen.
import android.os.Bundle
import androidx.activity.ComponentActivity
import androidx.activity.compose.setContent
import androidx.compose.foundation.background
import androidx.compose.foundation.layout.*
import androidx.compose.foundation.lazy.LazyColumn
import androidx.compose.foundation.selection.toggleable
import androidx.compose.material.icons.Icons
import androidx.compose.material.icons.filled.Favorite
import androidx.compose.material.icons.filled.Menu
import androidx.compose.material3.*
import androidx.compose.runtime.*
import androidx.compose.runtime.saveable.rememberSaveable
import androidx.compose.ui.Alignment
import androidx.compose.ui.Modifier
import androidx.compose.ui.graphics.Color
import androidx.compose.ui.semantics.Role
import androidx.compose.ui.unit.dp
import androidx.core.view.WindowCompat
import com.example.delete_composem3.ui.theme.TestTheme
import io.ktor.util.*
import kotlinx.coroutines.launch

class MainActivity : ComponentActivity() {
    override fun onCreate(savedInstanceState: Bundle?) {
        //uncommenting the line below will make the bottom sheet to not appear at all and make the ui frozen
        //WindowCompat.setDecorFitsSystemWindows(window, false)

        super.onCreate(savedInstanceState)

        setContent {
            TestTheme {
                ModalBottomSheetSample()
            }
        }
    }
}

@OptIn(ExperimentalMaterial3Api::class)
@Composable
fun ModalBottomSheetSample() {
    var openBottomSheet by rememberSaveable { mutableStateOf(false) }
    var skipPartiallyExpanded by remember { mutableStateOf(false) }
    val scope = rememberCoroutineScope()
    val bottomSheetState = rememberModalBottomSheetState(
        skipPartiallyExpanded = skipPartiallyExpanded
    )

    // App content
    Column(
        modifier = Modifier.fillMaxSize(),
        horizontalAlignment = Alignment.CenterHorizontally,
        verticalArrangement = Arrangement.Center
    ) {
        Row(
            Modifier.toggleable(
                value = skipPartiallyExpanded,
                role = Role.Checkbox,
                onValueChange = { checked -> skipPartiallyExpanded = checked }
            )
        ) {
            Checkbox(checked = skipPartiallyExpanded, onCheckedChange = null)
            Spacer(Modifier.width(16.dp))
            Text("Skip partially expanded State")
        }
        Button(onClick = { openBottomSheet = !openBottomSheet }) {
            Text(text = "Show Bottom Sheet")
        }
    }

    // Sheet content
    if (openBottomSheet) {
        ModalBottomSheet(
            onDismissRequest = { openBottomSheet = false },
            sheetState = bottomSheetState,
        ) {
            Row(Modifier.fillMaxWidth(), horizontalArrangement = Arrangement.Center) {
                Button(
                    // Note: If you provide logic outside of onDismissRequest to remove the sheet,
                    // you must additionally handle intended state cleanup, if any.
                    onClick = {
                        scope.launch { bottomSheetState.hide() }.invokeOnCompletion {
                            if (!bottomSheetState.isVisible) {
                                openBottomSheet = false
                            }
                        }
                    }
                ) {
                    Text("Hide Bottom Sheet")
                }
            }
            LazyColumn {
                items(50) {
                    ListItem(
                        headlineContent = { Text("Item $it") },
                        leadingContent = {
                            Icon(
                                Icons.Default.Favorite,
                                contentDescription = "Localized description"
                            )
                        }
                    )
                }
            }
        }
    }
}