Ted, it's a shame that BT seem to be going zealous about the MAIL FROM details, but I wonder if it's inevitable with cheap dialup accounts like theirs being so popular with spammers.
http://www.sendmail.org/~ca/email/auth.html suggests that SMTP authentication is in sendmail 8.10 and later. If you are upgrading anyway, I can confirm that it works in Exim, as described in http://www.exim.org/exim-html-4.50/doc/html/spec_33.html
The description is RFC 2554 ftp://ftp.cs.nott.ac.uk/rfc/rfc2554.txt
Seeing as you have to make changes, you could even try changing ISP away from that BT Yahoo. UKFSN.org and thephone.coop will both put the money they make from you to better use, in my opinion.