EMB-175 First Officer reported after being given clearance and starting the approach; they realized the aircraft was in the correct location in relation to the glide path. At the same time ATC issued a low altitude alert. The crew turn all automation off and manually completed the approach.

Narrative

The Captain was flying the leg; and on a vectored base leg to join the approach into ZZZ. ATC asked if we saw the airport and traffic at our 12 o'clock. We called the airport in sight; but not the traffic and we were cleared for the approach for XXR. We dialed in the lower altitude and started descending on the glide slope. At around 3300-3400 ft. we were asked if we had the traffic in sight; we said no and we were told to maintain 4000 ft. I asked if they wanted us to climb to 4000; and we got a vector of 300 away from the traffic and off the approach. Then ATC made the comment it looked like we were on the localizer; and we were told to continue the approach. We rejoined the localizer and continued descending; and it was when we were about 200- 300 ft. below the glide slope that the Captain said something wasn't working right; and added power to climb out. ATC called us with a terrain alert; and we climbed to correct and the Captain finished the approach hand flown. Unclear and misinterpreted instructions by ATC caused us to change automation modes very rapidly in the terminal environment. We think that this resulted in us being in an undesired automation state; and since we were very task saturated; we didn't notice that we were not in the correct mode when the incident occurred. When things get as hairy as they did there; then looking back at it the smartest thing would have been to go around as soon as we were confused about ATC instructions and intentions. It would have given us time and let up on the workload that we were experiencing. Verbalizing task saturation would be good to do as well; and to be more aware of the saturation levels that can happen in the terminal environment.