Are underlined links better for in your site's navigation? There is an active thread at Cre8asite discussing the various reasons why you might underline or not underline links. It goes into how users might be "trained" to recognize underline links in the various parts of your site. Why its good to be consistent with your links for the sake of usability and what colors are most recognized. Naturally underlined blue links are seen as the most recognized, they have been a standard method for using links correctly for quite some time. But what about different colors, hovers, and straight non-underlined links? There are a couple of approaches being discussed that help illustrate whether underling works best.
One of the members reasons that it depends on the "context" of the link, and your intention for the user. Do you assume that your visitors are pretty intuitive and can easy decipher where to click next? For those that are not as web savvy, nothing beats a blue underlined link, a tradition even my never touched a computer in his life grandfather can learn to use pretty quickly. Nick W goes on to say that you should underline links in the body of your copy. Putting inline lines inside a sentence and making them stand out eliminates the need for extra thought which can help them navigate better. One particular idea for use in content was to use a "dotted" underline in blue that goes to red on hover for making it clear that the link leads to a page somewhere else. You can then use the standard underline in the top and side navigation sections to easily define the various types of links on the site. Those in the navigation within the site, and those links that lead off the page.
The discussion goes on to discuss the various coloring options for links. The member Scratch, asks the question "Is the user 100% obvious that these are links?". If so then you have the option to change the text decoration. If it isn't obvious with decoration, maybe consider why it isn't obvious.
Continued discussing Links in navigation, to underline or not to underline?