Microsoft has promised to boost Hotmail in-boxes to 250Mbytes from the exisitng 2Mbytes.
The storage increase for Hotmail will be rolled out in July in the US and other countries, said Lisa Gurry, director of Microsoft's MSN internet division.
"The landscape has changed regarding users' need for extra e-mail storage and we don't want storage to be an issue for any Hotmail user," she said.
Gurry declined to reveal the geographical roll-out schedule but said Microsoft planned to eventually extend the bigger in-boxes to all 170 million Hotmail subscribers.
Last week, Yahoo announced plans to boost the in-box size for its free web-based e-mail service, from 4Mbytes to 100Mbytes.
Other enhancements to the Hotmail service include the ability to send attachments up to 10Mbytes in size, up from a previous e-mail maximum size of 1Mbyte including attachments, and the cleaning of viruses in infected outgoing or incoming e-mail messages, she said.
Previously, Microsoft scanned all outgoing and incoming Hotmail e-mail messages, but did not clean them, she said.
Microsoft will provide this anti-virus service in partnership with Network Associates' McAfee unit. The company will continue providing anti-spam features in Hotmail, in partnership with Brightmail.
Microsoft has also announced a new fee-based e-mail service called MSN Hotmail Plus, which will offer users 2Gbytes of in-box storage and the ability to send 20Mbyte attachments for $19.95 (£11) a year.
Previously, Hotmail users could buy extra storage on top of the standard 2Mbytes that the free service features at different price levels, starting at $19.95 a year for 10Mbytes of in-box storage and a maximum attachment size of 3Mbytes up to the highest tier, which at $59.95 a year offered 100Mbytes of storage and a maximum attachment size of 20Mbytes. Hotmail Plus users also get the benefit of not receiving graphical advertisements.
Yahoo has opted to do a similar thing by eliminating its tiered extra storage offers for its web-based e-mail service, offering instead one fee-based plan of $19.99 a year which gives users 2Gbytes of in-box storage.
Juan Carlos Perez writes for IDG News Service