#  By Ryan Singel  Email Author # May 18, 2010  |  # 12:01 am

Microsoft is unveiling a major upgrade to Hotmail this summer, in an attempt to become the top webmail provider in the U.S. by outdoing the innovations that Google’s Gmail brought to the online inbox.

Now nearly 15 years old, Hotmail serves more users worldwide than any other online e-mail service, with 360 million users.

Despite reports to the contrary, e-mail isn’t going away anytime soon, Microsoft said, noting that even avid users of social media services check their e-mail more often than other users, and Hotmail users share 1.5 billion photos a month.

But a year ago, the Hotmail team looked around and realized that Hotmail was lacking features (particularly in comparison to Gmail, which remains in third place among webmail providers, though its numbers continue to grow).

“Hotmail wasn’t doing the best job it could to serve customers,” Microsoft vice president Chris Jones told reporters Monday at a briefing in San Francisco. “We were behind on features and we felt like being number (one) in the U.S. market was important for us.”

So now Microsoft wants to make e-mail simpler, automatically divvying up emails into convenient categories, such as e-mails from contacts, ones from e-mail lists, ones from social media services, ones with photos, others with Office documents, etc.

Starting in July or August, users will encounter a first screen that’s on overview of new messages, sorted into categories, with e-mails from known contacts in the top heap, updates from services like Facebook and Twitter at the bottom, and a bar up top that lets you send a status message to whatever online service you like.

Once you are past that into the typical view of an inbox, there are one click options on the top bar and the left bar to view messages of different types. Users can easily categorize messages and even permanently rid themselves of annoying marketing messages using what Microsoft calls “Sweeping,” which moves all messages — past and future — from selected marketers or annoying contacts into the trash.

But perhaps the most interesting part of the upgrade comes with messages involving photos or Office documents. Hotmail will soon open emails with multiple photos attached by displaying them in a row on the screen, and users can click to launch a graceful slideshow right inside the browser (see the top image) using Microsoft’s own Flash-like platform Silverlight, which users will have to install to get the full shebang.

The online gallery and preview also works with links to public galleries on SmugMug and Flickr, and Microsoft says it’s working on doing the same for galleries that aren’t public that a user has the right to see.

Users can also open a Microsoft Word, Excel or PowerPoint document into Office Live, an online service that pairs with Skydrive to give users 25GB of online storage. Once you open the document and make a change, the versions are saved online and you are prompted to e-mail the original recipient a link to the changed document. Neither user needs to have Office installed on their local machines to use the service.

Hotmail will let you watch video links from Hulu and YouTube right in the e-mail you are reading, and you can easily find videos to send to people using a Bing search drop down box in the compose window.

Sending a large selection of images is easy in the new Hotmail as well, since the images aren’t attached to the e-mail and instead are uploaded into a user’s 25GB SkyDrive. Recipients get an HTML e-mail with thumbnails of the image and a specially crafted link to look at a gallery online. Recipients will need a Microsoft Live ID to leave a comment on the photos, but don’t need one just to see or download them as a zip file.