Oh, bloody 'ell! 'effin BT!!! Setting up things correctly with them can be an absolute nightmare!!!
First try changing the smtp server from 'smtp.tools.sky.com' to 'mail.btinternet.com'. If that doesn't work, regard the error message you've received as equivalent to a '553 error' and try this:
http://bt.custhelp.com/app/answers/detail/c/346,401,412,418/a_id/10903
Eventually though, please consider getting an email address which isn't linked to
any ISP. I use the excellent service provided by GMX:
http://www.gmx.co.uk/
Although it's promoted as a web-based service you can still use it with Outlook:
http://help.gmx.com/mail/overview/pop3/outlook/
Further (by logging on via their website) you can configure it so that mail sent to any other address is automatically forwarded into your GMX Mailbox (or to a separate folder, if you prefer).