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Block the "reply-to" address, it's usually not yours.
This is a common tactic with many viruses, trojans, and worms. Frankly, to fix it or stop it, you'll have to find which exact infection it is, and then do whatever it takes to scrub it off your system. If your current anti-virus doesn't detect anything, then get another (I recommend AVG Antivirus...free for home users). You can try some reliable online scanners as well, and when you get a virus name, google it. See if a reputable company (like Symantec, or others) has a removal tool or procedure if your virus protection can't fix or isolate it.
No, it's not illegal to block your own email address, just a bad idea. Blocking spam by sender hasn't worked for a long time and no reputable spam blocker relies just on that method.
There are number of sites with great spam tools. I use Gmail and it works well for me. Few items slip through and I get few false positives. On any spam blocker though it may take a week or two to get it trained to reduce the errors on either side.
I use a product called MailWasher: it "pre-loads" headers and from-addresses, and classifies as safe, filtered, probable spam, or blacklisted.
I take a look at the headers, occaisionally mark one as friendly for my whitelist. . . and then tell it to process the mail and then load my mail-reader program. . .
Cuts out 99 44/100% of the spam. . .
Here is a write up on Spyware but i think your problem is just regular spam. i would suggest having your hotmail go through your outlook then use a spam program. I use Spambayes and it works great. I have 2 hotmail accounts plus 3 comcast and 2 other emails accounts coming into my outlook and Spambayes keeps it pretty clean
Use the links and download the programs:
SpyBot
AdAware
SpywareBlaster
Windows Defender
Avast (if you have no AntiVirus)
Install all 5 and follow the 1st startup wizards, Download all Updates.
Reboot your computer
Click f8 when starting pc. Before the windows logo screen come on f8 will being you to a menu. With WinXp you will get an option for SafeMode with Networking all other Windows versions just use SafeMode.
SafeMode starts windows with the minimal amount of drivers.
Run each of the programs and have them look for and fix problems they find.
Make sure you use the immunization button on SpyBot to block stuff from attacking in the future.
Some programs may want a reboot to finish cleaning your system. Make sure you reboot into safe mode again.
Using this system and running through it about once a month I have not had to deal with a slowing of the internet on my pc in years. If you computer is real bad you may want to do this for a few weeks in a row to get a good cleaning. This will not get rid of everything but should at least find most bad things on your pc, and provide you with information on what else is there. If there is something you are confused by Google it.
Download from:
http://www.download.com
What email program do you use? I had the same problem with spams that appeared to be coming from my own address. I created a rule in Outlook that sends email "from" my address to the junk mail folder unless it contains a line of text I have in my signature. That way if I do send something to myself I'll get it but a spoofed spam gets trashed because it doesn't have my signature text.
If your ISP uses Unix/Linux hosts, you might be able to upload a procmail script into your home directory that can handle it. You can define rules to stop that sort of spoofed junk mail from being delivered to your computer. The scripts are available at www.spambouncer.org.
Are these messages YOU are receiving, or are others receiving these messages with your address being the sender?