FYI - Your setup instructions worked fine for one of my hotmail accounts which is about 7 years old, my other hotmail account ive had for 3 years, this one doesnt work, complains about ERR to POP 3 server.Thanks, all corrected.
I've heard of people getting this before, I'm going to look into it.
By the way, how old is your account? I find a lot of articles in google saying that Hotmail was ending WebDAV access to new accounts in order to crack down on spam, but all the articles are around September 27, 2004. I know for a fact that I've had my hotmail account for at least six years, and I've always had the capability to open it in Outlook Express (which uses WebDAV). I'm thinking if it's a really new account, it might need to be active for a certain number of months before they give you WebDAV. Otherwise, it might be that all new accounts are not getting WebDAV at all, in which case you're SOL.
My only other suggestion is to try logging directly in via www.hotmail.com to confirm that the e-mail address and password are 100% correct, and that the account is active.
EDIT: Here's a website that confirms my suspicions: