Make sure you set your Hotmail account on your phone for POP settings. Hotmail does not use the IMAP protocol.
If you haven't already, you can try the manual setup under 'Other (POP3/IMAP)'. The default settings should be:
Incoming Server Settings
POP3 Server: pop3.live.com
Security Type: SSL
Outgoing server settings
SMTP server: smtp.live.com
Security Type: TLS
Other things to consider and try:
It could be a local Hotmail problem, so try again later.
You might have your Hotmail account set to connect with HTTPS. This might be causing an issue. You'll have to log-in to your Hotmail account via the web to confirm this setting.
Some people find changing their country/region on their Hotmail account settings helps.
Simply changing to a different password has helped some people overcome this issue, too.
Alternatively, you can try the Hotmail app from Android Market