Hotmail requires me to retype my password upon login every time. It tells me that either my password or login name is wrong. When I retype my p/w I get in. At first I thought it was typing errors, but no, it's not.
Have you tried our Hotmail Help guide? The https link in the first step helps get past most problems for most people. Also, this sounds similar to the Yahoo corrupted cookies file problem. Which web browser do you use?