Dagoth Ur's reign came about after the Battle of Red Mountain. This famous battle, paving the way for the formation of "modern" Morrowind, took place around 1E 700, towards the end of the War of the First Council between the Chimeri (led by Nerevar) and the Dwemeri (led by Dumac Dwarfking).
It is during this battle in Dumac Dwarfking's citadel (soon to become the headquarters of Dagoth Ur) that Kagrenac is supposed to (according to some sources) have used his tools upon the Heart of Lorkhan in order to strengthen the Dwemer and win the battle. However, his actions somehow caused the entire Dwemer race to disappear from Tamriel.
What happened during the battle is rather obscure since there are many sources that clash with each other. Some sources imply that during the battle, Nerevar and Dagoth Ur led a small platoon of troops into red mountain while the battle outside acted as a diversion. It is then said that Nerevar and Dagoth Ur encountered Dumac and Kagrenac within the mountain and a bloody duel broke out with Nerevar slaying Dumac and Dagoth Ur killing Kagrenac. It is implied that after the duel, Nerevar and Dagoth Ur used the Heart of Lorkhan to destroy the Dwemer race; this explains why the Dwemer disappeared.
Afterwards Nerevar is supposed to have left Dagoth Ur to guard the heart while he discussed with the Tribunal what he would do next. After coming to the conclusion that they would use the heart, Nerevar and his Tribunal returned to the heart chamber only to find that Dagoth Ur had been experimenting on the heart. It is then said that the Tribunal killed Dagoth Ur and poisoned Nerevar so that they could use the heart's power. Dagoth Ur's experiments on the heart allowed him to stay alive and slowly build his power.
Other sources imply that House Dagoth betrayed the Chimer and fought with the Dwemer (possibly because they disliked the other Chimer houses and tribes), and that Nerevar was slain during the battle. These sources state that Kagrenac accidentally wiped out the Dwemer in a vain attempt to empower them using the heart.
The use of the heart of Lorkhan angered the Daedra lord Azura so, that she punished the entire race for their betrayal by darkening their skin and turning their eyes red, transforming the Chimer into the Dunmer (Dark Elves) that currently inhabit Tamriel. She vowed that one day, a child born outside of Morrowind, under a certain sign, to uncertain parents, would rise as Nerevar reborn, and defeat Dagoth Ur as her champion. This "Nerevarine" is your character in the game.
Only after fulfilling the Nerevarine prophecy, and aquiring Kagrenac's tools (Sunder, Keening and Wraithguard) and the means to use them, can the player confront Dagoth Ur in his Dwemer fortress under Red Mountain.
Before entering the final chamber, Dagoth Ur speaks to the player, explaining a number of things, including his relationship with Nerevar, and his plans for Morrowind. Once the player exits this conversation, Dagoth Ur will allow the player to attack. The player must defeat him, at which time he simply disappears, then proceed to the final chamber. Once inside, the player will see Dagoth Ur standing in front of them, as alive as ever. He comments on the arrogance exhibited by attempting to kill a god, and resumes his assault. This time, the player will be unable to kill him by fighting.
The source of his power and immortality is the Heart of Lorkhan. Without destroying the Heart at the bottom of his chamber, Dagoth Ur cannot be killed. The player must proceed there, either by going down the spiral path to their right, avoiding the pit of lava at the bottom of the chamber, the creatures encountered along the way, and Dagoth himself, finally crossing the bridge at the bottom to the Heart on a small island in the center, or simply jumping down. The player must first use the hammer "Sunder" once on the heart, then repeatedly use the knife "Keening" to disrupt the magical shield around the heart and destroy it. Once destroyed, the player can engage Dagoth Ur himself, who is no longer protected by its power. If you thought you left him back at the top, think again. After destroying the heart, Dagoth appears on the bridge behind the player. The player has the choice to kill him here, or make their way back across the bridge, which triggers the bridge to collapse, along with Akulakhan, which the Heart resided in.
At this point, Dagoth Ur is dead, and leaving the chamber from the entrance will trigger the appearance of Azura, her words of gratitude to you for fulfilling your destiny, and the final custscene of the game, which can be continued afterwards to whatever end.
- Dagoth Ur's story is part of a much larger tale in the Elder Scrolls universe, and outside of Elder Scrolls III: Morrowind, he is mentioned in mutliple books and documents that deal with the subject of Nerevar, Lorkhan, the six great houses of Morrowind, or the events of the Nerevarine prophecy. Though the subject of Dagoth Ur does not come up naturally in the main questlines of Elder Scrolls IV and V, both games do contain information on him, if the player were to look hard enough.
- Had the player been unsuccessful in defeating Dagoth Ur, he would have used the heart to construct Akulakhan, a giant god. He would then be able to spread his corprus and blight diseases, and use Akulakhan to conquer all of Tamriel on a physical level. He would also be able to, using complicated means, literally make the universe Dagoth Ur.