A paid version, Windows Live Hotmail Plus, is also available for $19.99 a year and allows 4GB storage and other POP3 email accounts into the service.
Hotmail's much-needed makeover puts it in line with email service offerings from Google and Yahoo!.
Microsoft said the Windows Live Hotmail's beta stage had over 20 million users.
Later this month Outlook 2003 and Outlook 2007 customers will be able to access their Windows Live Hotmail email and contacts for free, using a beta of Microsoft Office Outlook Connector.
Current Hotmail users must upgrade their accounts before they can use the new service. Contacts and saved information can be transferred into the new interface.