My Outlook 2007 Client (w/ Connector) randomly stops working (Hotmail only). After a day or two, I usually just set up the account again, after which it works fine --- until the next time. I've also noticed that when I have problems, Hotmail is reporting problems, too, which suggests to me that the problem is on the server side.
The error I get is the same as everyone else is listing here, including the reference to a problem with the folder hierarchy. But I keep the Outlook Client end as flat --- no nested folders. Oddly enough, a folder hierarchy has appeared on the Hotmail end (web access); I've never set up a hierarchy on the Hotmail web side either, so it is being created on the server side ?!?!?!?@