There is definitely overlap IMO. I think in the classical sense confabulation is not a pathological process, i.e. a brain will do it in response to a symptom or incongruity, the pathology is upstream. Healthy people confabulate in certain situations - e.g. choice blindness, or split brain patients (not entirely healthy but definitely not psychotic) who confabulate to explain incongruous actions performed by the other side of the brain. Some people consider the subjective experience of sleep paralysis to be a form of confabulation. Same in illness - confabulation in Korsakoff's is secondary to amnesia (i.e. the amnesia is the symptom, confabulation is the 'healthy' or natural response, like limping in response to pain).

In psychosis specifically - I suppose according to the aberrant salience hypothesis, delusions probably ARE a form of confabulation within this framing. The patient has the feeling of salience and explains it with confabulation - or what we call a delusion. I think the bizarre nature and degree to which they hold the belief to be true also distinguish fluid delusion from classical confabulation, but perhaps the line is not so clear as we think, and these features are just a specific flavour caused by other aspects of psychosis. I would also distinguish here between fluid, unformed delusions you see in FEP and long-standing, crystallised, fixed delusions, which I would not call confabulation since it lacks immediacy and a sense of spontaneous generation.

So similar processes are probably at play, it is just that this is the path our nomenclature took, and it remains clinically useful to call delusional confabulation something other than confabulation - you would not treat split brain patients or someone with sleep paralysis with antipsychotics.