"Email is becoming less and less useful as inboxes become cluttered with newsletters and social updates, and people increasingly keep up their personal connections in social networks instead of their email address books," Microsoft's Chris Jones said in a blog post.
"All of this has led many to hope for a better solution so you don't have to settle for today's webmail."
Jones said that in the new Outlook.com service "your personal email comes alive with photos of your friends, recent status updates and tweets that your friend has shared with you, the ability to chat and video call - all powered by an always up-to-date contact list that is connected to your social networks".
The new Outlook.com replaces Hotmail, which was launched in 1996 and was among the first web-based email services. It is still among the largest with about 364 million users.
The upgrade drew some early positive reviews.
"Designed as an eventual replacement to Hotmail, the free browser-based service sports a strikingly simple interface, Skydrive and social media integration, and lots of tweaks both new and familiar," the editors at CNet wrote.
"And with a promise of 'virtually unlimited' storage (we'll see how that pans out), it should satisfy the most prolific writers and media consumers."
Mashable 's Peter Pachal said Outlook's "most interesting new feature" is "social integration".
"For whomever you're conversing with, Outlook imports their most recent tweets and Facebook updates, along with links to profile pages," he wrote.
"You can even like, comment, retweet and @reply straight from the pane."
Pachal added: "Microsoft's mail service has never been this clean or usable - or looked this similar to Gmail - before.
"Microsoft's web email service is much improved, and I'd even say superior to Gmail in many ways. If users are to have any issues, it'll probably be with the Outlook name. The brand generates a lot of bad blood among users, and people inherently fear sweeping changes."