How to separate iCloud Drive from Desktop & Documents
To answer your first question:

Deactivate storing your Desktop &amp; Document files in iCloud by doing the following:

Click Apple Menu (in the upper left corner of the menu bar) -> System Preferences -> iCloud -> Click Options (next to iCloud Drive) -> Uncheck Desktop &amp; Documents Folders -> Turn Off -> Done.

What may seem counterintuitive is that your files are still stored in the iCloud ( which is perhaps why you thought you lost them). 

To retrieve your files, you should open Finder and navigate to iCloud Drive, and then to the Documents folder within iCloud Drive. You should then manually transfer or copy the files from that directory to the local Documents directory on your computer. You should then do that same with your Desktop folder.

Answer to your second question here: Does Time Machine backup iCloud Drive files that are not stored locally?