This is caused by an MSN/hotmail upgrade over the past few weeks.
For squid configuration add the following in the respecitive squid.conf
acl hotmail_domains dstdomain .hotmail.msn.com
header_access Accept-Encoding deny hotmail_domains
This will tell squid to handle hotmail differently.
Quote off squid-users list:
Quite likely the Hotmail servers thinking your MSIE supports gzip
compression, but MSIE not remembering it does when the reply is a HTTP/1.0
reply..
Hope this helps.
Armin