I believe Hotmail may require an app password. This URL may help:

https://support.microsoft.com/en-us/account-billing/create-app-passwords-from-the-security-info-page-d8bc744a-ce3f-4d4d-89c9-eb38ab9d4137

Thanks for the suggestion, but I don't think this can be the problem, as I successfully created a Thunderbird profile from another hotmail account (one is for me and one for my partner - we have to give up our Virgin email addresses due to moving broadband suppliers) only this morning. There were no hitches at all with that one yet I followed exactly the same steps.

Possibly, if you post a screenshot of the error message at the time it happens. I infer it happens during setup?

Yes, the error message happened during setup. But this morning, having tried again, we are back to where I was before the error message appeared. I can load the new profile in Thunderbird without any error message and it looks like it should be fine. But it then checks the outlook server for the messages in the inbox and comes up with nothing. I can send a message successfully but that message won't copy to the Sent folder.

So, you can send messages successfully. That's positive news. Can you send email to yourself? When you do that, is the message available from the account when you sign in online?

I've just tried sending a message to self. As with other messages, it sends, though can't copy to the Sent folder. The sent message is visible in the web Outlook inbox but still doesn't make it into the empty Thunderbird inbox.

All I can suggest is to post the full content of any response received when retrieving mail and a screenshot of your incoming server settings pane.