Outlook and Outlook Express only know how to use WebDAV to access your
Hotmail account.  WebDAV is the old or original scripting language for
the commands sent between you and Microsoft's HTTP mail hosts (i.e.,
it was the protocol for Hotmail).  Microsoft disabled WebDAV for
freebie Hotmail accounts back in November 2004.  If you created a new
Hotmail account after that date, WebDAV was disabled in the new
freebie account so you couldn't connect using Outlook [Express].  If
you pay to a Hotmail account, WebDAV gets enabled for it so Outlook
[Express] will then work with that WebDAV-enabled account.  Freebie
accounts created before that date got grandfathered in so they would
continue to work; however, it seems they occasionally stop working
(who knows what Microsoft is doing in Hotmail), often after switching
from the old MSN Hotmail interface to the new Windows Hotmail Live
interface.

Some Hotmail history:
- 1996 July: Hotmail becomes available.
- 1997 December: Microsoft buys Hotmail.
- 2000 February: For MSN, POP3 access is discontinued and switches to
WebDAV access.  MSN "legacy" accounts created before that date
continue
to get POP3 access.  MSN accounts created after that date only get
WebDAV access.
- 2002 July: For Hotmail, POP3 access is discontinued and switches to
WebDAV access.
- 2004 November: For Hotmail, Microsoft changes policy to disable
WebDAV
access for *new* free Hotmail accounts created after that date.  Old
accounts created before that policy change date continue to get WebDAV
access.  New accounts created after that date must pay to get WebDAV
access.

You cannot use plain-vanilla Outlook to connect to free Hotmail
accounts.  WebDAV access to free Hotmail accounts was discontinued
back in November 2004. You need a paid Hotmail account to use Outlook
without the help of plug-ins; otherwise, you are stuck using the
webmail interface to Hotmail.
WebDAV was considered insecure so Microsoft came up with another
protocol call DeltaSync (http://en.wikipedia.org/wiki/DeltaSync) to
communicate with their HTTP servers but Outlook does not support it
yet. Windows Live Mail does support DeltaSync but is a replacement for
Outlook Express, not Outlook.  In Outlook, you can add support for
DeltaSync by installing the Outlook Connector plug-in. It is available
from Microsoft's download web site
(http://www.microsoft.com/downloads; search on "outlook connector").
After you install the plug-in, you will need to use that plug-in to
create an account in Outlook to access your new free Hotmail account.

The Outlook Connector plug-in is only supported in Outlook 2003 &
2007. If you have an old MSN Hotmail account, you will need to convert
it to a Hotmail Live account (your e-mail address remains the same).