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In web config you will find the following:-
<!--if you want to have different smtp settings per site, set EnableSiteSettingsSmtpSettings to trueand smtp settings will appear in SiteSettings. otherwise use the smtp settings below--><add key="EnableSiteSettingsSmtpSettings" value="false" /><add key="MaskSmtpPasswordInSiteSettings" value="true" /><add key="ShowSmtpEncodingOption" value="false" /> <!-- ******* end multi site installation settings --><!-- ******* email settingsNote you also need to specify smtp settings further below in system.net section the settings here appply to features butthe settings in the system.net.mailsettigns section are used by site registration and password recovery --><add key="DisableDotNetOpenMail" value="true" /><add key="SMTPServer" value="localhost" /><add key="SMTPRequiresAuthentication" value="false" /><add key="SMTPUseSsl" value="false" /><add key="SMTPPort" value="25" /><add key="SMTPUser" value="UserName" /><add key="SMTPPassword" value="UPassword" /><add key="SMTPTimeoutInMilliseconds" value="30000" /><!-- leave this blank for ascii encoding --><add key="SmtpPreferredEncoding" value="" /><!-- example for Russian encoding<add key="SmtpPreferredEncoding" value="koi8-r" />-->
In related site mode changing the SMTPServer setting appear not to work. If however you change EnableSiteSettingsSmtpSettings to true and then set smtp in site settings it works fine.
Are you sure the web.config way does not work in folder sites? It works for me. If you have those settings in user.config youmust touch Web.config after making a change so it will reload the settings.
Although I have to enter the actual domain details for the SMTP server as using localhost will not work with my mail server. I spent the best part of 2 days trying to work out why on this site it wouldnt work but all the others it did. Only way I could get it to work was to alter EnableSiteSettingsSmtpSettings. Its certainly not a major problem but had me scratching my head