Happy to explain! When you select "log email" in the Outlook Extension, this will automatically create a contact in the HubSpot CRM.
I would suggest unchecking "Log Email" in your Log and Track Preferences so contacts aren't created each time you or a colleague sends an email. By selecting this preference, you can manually select "Log Email" each time you send an email to contact which will give you more control of contact creation in HubSpot. This knowledge base article goes into further detail on how to customize your log and track preferences.
The new contacts setting you are referring to is in regard to records associations defaults (more on this here). When you select "new contacts" this setting willautomatically log emails to new contacts included in the email. If the email is sent to an email address that is not associated to an existing contact in your CRM,a new contact record will be created and the email will log to this record.
If you have any contacts with certain domains that you would like to never be logged into the CRM such as your company domain, I would suggest adding them to your personal or team's never log list.