Your POP settings must be fine since you're receiving mail, so it's just SMTP we need to look at. Let the games begin!

First, in general, anytime you're trying to troubleshoot SMTP settings, always delete your stuck test messages. I've found that, even after you've made changes to the settings, these messages often continue to use the previous settings, so you can't tell if you've actually fixed the problem. Second, also in general, I've found that quitting and relaunching Mail between every SMTP change is a good thing.

Getting specific, at this point I'd suggest deleting the SMTP server and starting fresh. Let's see, Yahoo says the settings are supposed to be:

Server: plus.smtp.mail.yahoo.com with SSL enabled, set for port 465 with password authentication.

I've found that, even though Leopard's Mail defaults to trying ports 25, 465 and 587, it's more reliable to set it to use a custom port and enter just the correct one, to prevent things from timing out while it's going through the cycle.

I've also found that, regardless of what you initially enter in the password field, you're asked for the password anyway by the server. My question is whether you get far enough to get that prompt. If not, you may not even be getting to the server in the first place. If you are getting that prompt and it's not working, it's a user name/password issue. Of course you know you're using the correct ones else you wouldn't be receiving messages, but I've seen it work for one and fail for the other.

Let me know what happens and we'll take it from there.