Windows Live Messenger Translator
(View screenshots)
Install
Download and run the setup MSI file.
Then open your Windows Live Messenger, and from the menu bar (kind
of hidden) select
Tools->Options.
In the
Options window, select
Add-ins
and click Add to Messenger.
Browse to the installation folder (
C:\Program
Files\Senstic\Microsoft Live Messenger Translator Add-In\) and
select
TranslatorAddin.Addin.dll.
How to Use
From the Tools->Options->Add-ins, click the
Settings button to bring up the Translator Options.

You have choices to translate outgoing chat messages, incoming
chat message, or both. Click the corresponding checkbox and
select the language pair to invoke the translation. Click
OK to save the setting.

Now you have to turn on the Translator. At the main window of
Microsoft Live Messenger, click your status button
and check Turn on
TranslatorAddin.Addin.dll to turn it on, and enjoy.
When you are through (or fed up with funny translations ;-), you can
turn it off at the same menu.

Limitation
(Actually a Feature)
Both you and your chatting partner will see the original text
along with translated text, so there won't be any misunderstanding
due to questionable translations.