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Through several dialogue lines, Dagoth Ur offers to let you deliver the first hit on him before your fight, only to turn immediately hostile and chuck a fireball at you. This could be interpreted as him playing dirty, and that he's actually just a bastard who will use whatever means to grasp at victory, sure... In that case, why let you hit him at all then? He's not immediately hostile after all, and it's not like he isn't a God (how can you kill a God?).
I think more than anything that this was just an oversight on Bethesda's part, a leftover script from the cut behavior of other ash vampires where they'd only turn hostile after you engaged in dialogue with them.
The mod removes the 'setfight 100' script that activates during his dialogue, meaning the man is now completely docile entirely honorable. Relatively simple mod, perhaps too much so, but I haven't seen anyone care enough to address it, so there.
Compatibility Should be compatible with anything that doesn't edit Dagoth Ur's 'final questions' dialogue topic, and I doubt any mods do.
Installation Simple .esp file. Download the zip, extract into 'Morrowind/Data Files', enable in the launcher.