I would edit that message after you have settled a bit.

did you benchmark and compare this solution to yours?
whats the result?

my guess is you solution is even worse because of regular string reallocations in output += MORSE_CODE[item] and try/except is not free either

double loop solution is simple and easy to understand - split words, split letters, convert, join letters to words, join words to sentence

your solution:
split by space and try to decode each "letter"
if next "letter" is '' then it must be word separator - append space, and on next cycle too, and on next
and wrap it in try/except because processing last letter will cause list index out of range. exception in morse[index + 1]

flow control via exceptions is a big no-no

and it took me almost 10 mins to comprehend your algorithm