Hi,
I'm using Windows 7 and have Outlook 2007 installed. Although I have moved to using webmail almost exclusively, I was using Outlook earlier this year and, as I recall, had this password problem.
Now, the bad news.... I don't recall how I solved it.
I
believe it was a matter of going into Options > Account Settings and then clicking to highlight the account in question and then clicking "change." Then I had to update/modify the 'logon information' to the appropriate username & password.
The reason is that, in my case, I think I was getting the failed password retention because I had changed the password to an account at the
webmail interface but
didn't change it in Outlook. So, when trying to send/receive from Outlook, the box popped up saying it couldn't log on. At that point I remembered that I had changed the password at the webmail but not yet in Outlook, so I proceeded to changed it, but
only in the pop-up logon dialog box, NOT in the Account Settings, which was why it wasn't 'sticking.' Once I changed it in the Account Settings, I was back in business.
I'm not entirely sure I remember my situation accurately, and I obviously have no clue whether this might help you or not, since I suspect my problem was quite different from yours.
But I hope it might help a little.