Primarily used to describe confusion caused by drinking too much alcohol. After several shots, his thoughts were completely fuddled.
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Mental Clarity
Can describe someone's state when they can't think straight, even not related to alcohol. She was so fuddled by the complex math problem that she gave up.
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Colloquial Usage
It's a casual word, so it's not suitable for formal writing or speaking. I wouldn't tell my boss I'm fuddled; I'd say 'I'm having trouble focusing'.