I have Inno Setup script, where I need to use the SignTool=signtool, which is configured properly and worked in past.

But it's failing when I try to compile with the following error:
Sign Tool failed with exit code 0x1.

You didn't provide us any information that we can use to debug your problem.
So I'm posting generic instructions to debug issues with a "sign tool".
Try command-line compiler (ISCC.exe). It will preserve a full signtool.exe error message in the output:

Or temporarily prefix the sign tool command with cmd.exe /k to preserve its output even when compiling in Inno Setup GUI Compiler. E.g.:
cmd.exe /k C:\path\to\signtool.exe sign /f C:\mykey.pfx $f

Note that if you use a path to signtool.exe with spaces, due to the way cmd works, you have to wrap not only the path itself to double quotes, but also the whole command:
cmd.exe /k ""C:\path to signtool\signtool.exe" sign /f C:\mykey.pfx $f"
See also signtool fail with Inno Setup with exit code 0x1.
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