What is probably happening is that your Microsoft account/WLID has 2-factor authentication enabled on it.
Older Microsoft login forms (like the one used in Photosynth's desktop application) don't know anything about 2-factor authentication and therefore cannot ask you for a code from your phone or email and therefore the server won't allow you to sign in.
There are two ways to solve this:
Option 1) Create an 'app password' to use with Photosynth's desktop app at http://account.live.com/
(It will auto generate a difficult to remember random string of gibberish which is not too handy for logging in)
Option 2) Deactivate 2-factor authentication on your account at http://account.live.com/
(This isn't very secure nowadays, but at least you can successfully use your one password at all Microsoft logins without being harassed.)