Thanks for your report.
Can you try to uninstall WinSCP (keeping your settings), restart the machine, reinstall WinSCP, and restart again?
When I am dragging files directly from WinSCP to Windows Explorer (doesn't matter if the location is the desktop or other), WinSCP creates a temp folder without ever downloading the files (the folders are created as "scpxxxxx" with random numbers replacing the x's).
Selecting the files, right clicking and selecting Download works. Also, dragging and dropping from my computer to WinSCP works just fine. WinSCP seemed to do this just fine a couple versions back.
Windows 10 Home Ver. 1511 Build 10586.164
WinSCP Version 5.7.7 Build 6257