Hotmail is boosting the amount of storage space for users of both its free and paid e-mail service.
From late summer, the basic allowance will be boosted to 250MB and paying customers will get two gigabytes.
The move is widely seen as a response to Google's GMail service which gives all users a gigabyte of storage to keep all their messages.
With the announcement, Hotmail becomes one of a growing pool of e-mail firms offering users huge amounts of storage.
Currently, paying customers of Microsoft's Hotmail get at least 10MB of storage space and those who use it for free have 2MB for their old messages.
Boosting storage limits means Hotmail must revamp its charging system which is based around a "pay more to store more" system.
The new service with the boosted storage will be called Hotmail Plus and will cost $19.95 per year. Users who currently pay more for storage will be moved across to this service.
Users of Hotmail Plus will also be able to send messages with attachments up to 20MB in size.
In a related announcement Microsoft said that it will also start using anti-virus software to spot infected e-mails sent to or from its web-based mail service.
Gmail - 1GB storage, 10MB attachments
Hotmail Plus - $19.95 per year, 2GB storage, 20MB attachments
Hotmail free - 250MB storage, 10MB attachments
Yahoo Mail Plus - £11.99, 2GB storage, 10MB attachments
Yahoo Free - 100MB of storage, 10MB attachments
Lycos UK Personal - £41.88 per year, 1GB storage, 50MB attachments
Lycos UK - free, 10MB storage
Spymac - free, 1GB storage
Ask Jeeves - free, 250MB storage
Ask Jeeves Excite Gold - $19.99 per year, 2GB storage
Shiremail - £42 per year, 1GB storage
According to statistics gathered by Nielsen/NetRatings Hotmail had more than 34 million unique users in May 2004.
Microsoft's announcement is only the latest response to Google's creation of its GMail service that gives all users a gigabyte of storage and encourages people to keep, rather than delete, old e-mail messages.
Soon after Google's announcement in April Yahoo said it would start offering 100MB to non-paying users and two gigabytes to paying customers. It too changed its charging system and rolled many add-on services into a single subscription package.
Ask Jeeves has also increased the amount of storage for users of its free e-mail services. Now users of MyWay, Excite and IWon will get 125MB of hard disk space.
Others offering a gigabyte of storage include the UK's Planet Tolkien which, through its Shiremail service, gives people an account for £3.50 per month.
Also in the UK Lycos has given users 1GB for a fee of £3.49 per month. By contrast users of its free service get 10MB.
Mac users are not losing out either. Spymac is offering users 1GB of storage free and starting doing on on 5 April this year.
One gigabyte of hard drive space is estimated to be enough for about 500,000 pages of messages.