Basically, there's no easy way to stop Office sending information to Microsoft. The company says the data is required to keep the suite up to date, troubleshoot problems, and make improvements. The basic level sends
The basic level sends Office settings, device capabilities, app crashes, and connectivity data. Full includes all this, as well as which programs you open, how long they run, and which features you use. This is then used to tell you about features you aren't utilizing, among other things.
Office 365 and GDPR
It's not clear how long Microsoft has been collecting this data in Office 365, but it's no coincidence that it coincides with the recent GDPR rollout. Under the new regulation, companies have to be more careful about the data they collect and delete it at user's requests.
It requires users to give specific consent for data processing, but there are a few caveats. If the data is being used for legitimate interests of the data controller (such as improving the service) consent is not required.
While Microsoft can make that argument for the ‘basic' level, it's unlikely it can do the same for its full diagnostics. This may be the reason behind the new option, and the inability to disable it entirely.
The company has vowed to roll out its GDPR compliance worldwide, so you may be seeing this option regardless of whether you're in the EU. According to Microsoft, it doesn't collect any identifying information, but previous revelations about the NSA's PRISM program make it hard to trust entirely.