It may have worked in the past, but if you are not using a Microsoft account with your Microsoft Live Mail account, then you may find it difficult to send pictures via email with Googles Picasa. This will depend on the version of your software, but if using the latest versions then expect this issue.
After doing some research the reason it will now prompt you to login to your Microsoft account, is because the way Live Mail now sends images (called Photo email), is to use Microsoft's OneDrive. Images are stored on OneDrive, then a thumbnail is attached to the email, with a link to the full image on OneDrive.
If you are prompted for an account and bypass it by pressing cancel, this will not work and you will probably encounter an error.
There are a couple of solutions here, the most obvious is to create Microsoft account. The alternative solution is use a different email client like Mozilla Thunderbird.