I received this same email, it is a fairly simple brained and stupid scam. It works by sending an email and programing the server to make the recipient think that it came from an alternative email address. On hotmail, it confirms "sender ID" which will simply state that the email could not be confirmed that it was sent by the sender that it claims.
it is important to report these scams to paypal and keep close track of your account activity. but unless you click on the link in the email, rather than opening a new page and physically typing www.paypal.com, there is nothing that the person can do.
this feature also helps spam emails get past your spam filter. I receive about 4 emails a week that claim to be from my own email account. it makes the email, though advertising viagra or lazer eye surgery, get right into my inbox.