Obtain a stone. Find a texture that looks like the first image. Craft a stone knife on that texture, then drag your flare/bandage to your hand slot. It should work.

Ok I think I've found out why we're getting different results; it depends on the texture you're performing the action on. This texture = hands slot not locked This texture = hand slot is locked

100%. I even get the options to use the item I put in my hands, e.g. "light flare". Trying to use it results in a message saying "I can't do that right now" (or some such).

I can put other objects in my hands while crafting a stone knife. When you begin the animation the original stone seems to disappear from your hands, and you receive the knife when it has finished. During the animation you have full use of the hand slot however. Searching for stones does indeed lock the hands, however.

Just cancelling the once is enough to lock the hands, there's no "spamming" required.

Cancelling while drinking from a pump seems to lock the hands slot. Drinking again and letting the animation complete fully unlocks the hands slot again. Get the same behavior on multiple fresh characters, at different wells, on different servers, and different hives (1pp and 3pp). If you try to use an item (e.g. right click rag->bandage) while in this state, you will eventually get the message "Error putting item in your hands"