One (or two) things that hurt the immersion for me is that the day is so short and the land is not to scale.
I think Fallout had the perfect way of handling time; it runs at real time. So you get 12 hours of light, then 12 hours of dark. If you don't want to hang around for 12 hours then you can "sleep" until the time you like. This makes you feel like you're not on a planet with a 20 minute day (which is what Morrowind feels like). Vampires might have an easier time of it, too. I mean, is there even any reason why the day is this short?
Also, despite Morrowind having a large landmass (for a game) it's certainly not very realistic; Vivec, a place one supposes should be a major city, has a population of, maybe, 500 at the most, and is tiny, sizewise. I'm unsure what a solution could be, though, since obviously building a realistic landmass of a thousand kilometers across is pretty much unfeasible (unless you built the important locations, then randomised the land in between. This wouldn't even have to be different each time. It could generate the land in between based on the same seed each time the game is run, so the land won't seem random to the player), and also would be quite annoying to travel across (unless given some sort of Fallout esque map to use). Alternately, the game could simply be set on a smaller island, though obviously such a place wouldn't have the diverse environments of Morrowind. It's just very distracting that Balmora is smaller a shopping centre, when it's supposed to be a bustling town.
Besides this, if Morrowind were also given some sort of random mission generator (ala Escape Velocity: Nova or Privateer) then it would be much easier to "live" in a certain location, without moving from location to location sapping the quests from each area like a leech...
Despite all this, though, I have the temptation to install Morrowind again and try and finish the main quest, and continue Tribunal (got stuck underneath the sewers, last time)... I've found a few mods that look like they'll improve the look of the game.
I think it's a pity that Morrowind's greatest flaws would have been fairly easily corrected (dialogue trees, random missions, realistic day length, realistic land size) compared to some of the really time consuming things (all those books!).
Well, I await Elder Scrolls 4...