There was a time when Hotmail and Y! Mail allowed the use of inline images when composing an e-mail, but then took away that functionality for whatever reasons. Gmail to the best of my knowledge has never had a native way of using inline images when composing a new message.
Using a little copy/paste magic, you can insert inline images when composing a new mail from Gmail, Y! Mail or Hotmail. All it requires is to use the “Rich Text” editing method and a quick copy/paste.
See video below for details on how to do it.
Note: Yes, this also does work with e-mail signatures with Hotmail and Y! Mail, but not Gmail because Gmail use the rich text editor for signature composition.

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