The ancestral tombs. It's not enough that they're all cramped dungeons, but then you hear the ancestral spirits whisper. Then you find yourself brutally surprised by one of the various permanently grinning undead.
Dagoth Ur is literally nightmare fuel, he is a Mad Dreamer who gives Bad Dreams to people. Here's a quick example: note I AM THE SHARMAT I AM OLDER THAN MUSIC WHAT I BRING IS LIGHT WHAT I BRING IS A STAR WHAT I BRING IS AN ANCIENT SEA WHEN YOU SLEEP YOU SEE ME DANCING AT THE CORE IT IS NOT A BLIGHT IT IS MY HOUSE I PUT A STAR INTO THE WORLD'S MOUTH TO MURDER IT TEAR DOWN THE PYLONS MY BLIND FISH SWIM IN THE NEW PHLOGISTON TEAR DOWN THE PYLONS MY DEAF MOONS SING AND BURN AND ORBIT ME I AM OLDER THAN MUSIC WHAT I BRING IS LIGHT WHAT I BRING IS A STAR WHAT I BRING IS AN ANCIENT SEA
Corprus disease is And I Must Scream in a contagious form. It's similar to leprosy or cancer... but worse. Corprus twists your mind and body the longer you have it, sapping your intelligence and driving you mad. Like leprosy, it is obvious and causes almost everyone to wish that you'd go away. You will eventually become a shambling, tumorous mass as the disease takes effect; the perpetual agony will leave you Always Chaotic Evil, lashing out mindlessly at anything that comes near - and potentially spreading the disease to them. It also stops the aging process, so if you catch it and don't die of it, you'll live until somebody kills you. And you won't have the mental faculties to commit suicide any more. All you will know is the pain - and the will of Dagoth Ur. There is no known cure.
A very long-term one, but the knowledge that Morrowind is destroyed by the actions of the Nerevarine. When the rogue moon falls on Vivec and sets off a massive eruption at Red Mountain every major settlement on Vvardenfell is leveled and many mainland cities are also destroyed. The death toll is in the millions and it's all your fault, congratulations.
The alternative would have been to allow Dagoth Ur's consciousness to take over that of every single other living being there is, eventually coming to engulf the universe in its entirety. That's not horrifying.
In one cave, you can find several dead bodies, skeletons and a potion ingredient: Human flesh. Squick.
Corprus. A hideous disease that burns out the mind and twists the flesh, leaving the person nothing but a gibbering horror. Even worse, those infected with Corprus become immune to disease, and no longer age. Meaning there's nowayout, save by a violent death.
Some lucky few infected do die from it. The description paints it as a horribly painful death.
The ash creatures. They are all creepy, but the fact that they all used to be human (well, Dunmer) as well just pushes it beyond creepy and full-on into horror.
The castle Tel Vos. Normally, it's not that creepy, but when you explore the depths you find that it's (almost) entirely abandoned and overrun with giant plants. The part that drives it home is how you keep finding diary entries from those who worked in the castle as everything went to hell. And the owner and his servants nonchalantly live on the upper levels like there's nothing wrong.
Morrowind's dungeons often contain Daedric shrines, which invariably have offerings laid out in front of them. These are always valuable objects, precious stones, weapons and such. But there is a catch: The Daedra to whom the shrine belongs views those objects as its own, and evidently does not take kindly to you thieving them. One of the offerings - just one - will, if you touch it, immediately summon something very nasty behind you.
A similar example happens in a Dunmer ancestral tomb. When exploring such tombs, at times you will come across an intact skeleton, laid to rest. Nothing unusual, these are tombs, after all. In one such tomb however, after picking some loot, one of the skeletons is awakened and attacks you. It's a little unsettling in that the skeleton is in a different room when this happens, so you'll be treated to the combat music without an enemy in sight, only to walk out of the room and find that the skeleton you just walked past has been reanimated.
The in-game book Chance's Folly. The insane warrior's betrayal of the young thief is quite disturbing, as she is sealed for the rest of her life in a room with no way out. And to top it off? It's not fiction, either. Try dropping in to one of the ancestral tombs in Morrowind...
Another freaky in-game book is the innocently titled Surfeit of Thieves. In it, a pair of thieves, a male named Indyk and a female named Heriah, find a secluded castle. Told by others it is full of riches, but occupied by monks, they plan to break in. With Indyk apparently distracting the guard, Heriah breaks in elsewhere. She gets caught by one of the occupants of the castle, who asks her if she is "Lady Tressed". Going along with the deception, she allows the monk who caught her to lead her back to a feast, where her partner is sitting at a table, albeit hooded to disguise himself. At the table, she notices, during the introductions from the monks, that all their names are backwards, due to an enchantment set to run out after the hourglass at the center of the table does. At some point, she hears her partner be referred to as "Esruoc Tsrif", shortly before trying to leave. However, the monks stop her from leaving, just as the enchantment runs out. If you don't understand why this story is freaky, look at the names the monks gave the thieves, and remember that the enchantment makes stated names backwards from the true names...
The Sixth House bases are generally pretty dark and creepy; first take the ash creatures previously mentioned, then add things like those giant voodoo doll looking things, bells that are capable of producing near-BrownNotes, and at least one of them features bizarre furniture arrangements that brings to mind Poltergeist.
The hulking Grahl enemies found in the same dungeons have the opposite effect but can be equally dreadful. When you first run into one you usually only see a pair of glowing red eyes and a giant, vague silhouette as it slowly walks closer to you.
Netches. Though there are many odd enemies in Morrowind you can count on most of them being humanoid and ground-bound. Then you find a pack of these slow, physics defying, impossible,eldritch abominations. If you're brave enough to approach and hit one it will instantly flail around with sudden and unnerving speed, battering you with its foreign tendrils... All the while more of these cosmic horrors approach and begin to surround you.