I have the latest Windows Toolbar version (14.00.8064.0206) but as you can see in the screenshot below, the Sync your favorites option is not available anymore in the left menu, and a few days ago it was (it should be the third item in the left menu)!
I have Windows Vista, and didn’t run any updates lately. I tried uninstalling and reinstalling Windows Live Toolbar, restating the computer, I have temporarily removed the SkyDrive button, and I have also checked with two separate Windows user accounts (on the same computer) to see if it was nothing broken within the Windows profile settings, but in all cases the option is still missing.
On a different PC (with Windows XP) the option is available (it is the third option in the left menu):
Maybe this is a local issue (only on my computer, or only for this geographical region), or maybe this is “by design” (such as Windows Live Favorites synchronization is not supported in Vista anymore, or there is a bug with it?) but anyway, I wanted to let you know about it so if you see the same behavior in your case, you would know you are not alone. Hopefully this problem will be resolved automatically (just as it appeared) maybe with a next update or when Microsoft would restart a server that the client software needs. I’ll let you know if this happens with an update to this blog entry.
Update: I reported the issue to Microsoft using the Windows Live feedback form, and now (after just a few hours) everything works fine again.
Update: The issue seems to reappear, periodically and temporary, probably because of some Microsoft server being down or other external cause. On Windows XP trying to synchronize favorites an error shows up, explaining that Windows Live SkyDrive has a temporary problem.