This space is actually caused by the Hotmail DOCTYPE. Here are a few workarounds (these work in Hotmail and Yahoo Beta as well):
1.) Add style display:block to the image element
<img src=“test.jpg†style=“display:blockâ€>
2.) Add align absbottom in the image element
<img src=“test.jpg†align=“absbottomâ€>
3.) Add align texttop to the image element
<img src=“test.jpg†align=†texttop â€>
4.) Add line-height 10px or lower in the containing TD
<td style=“line-height:10pxâ€>
5.) Add font-size 6px or lower in the containing TD
<td style=“font-size:6pxâ€>