I wonder whether the disappearance will be explained to us in Oblivion.
And by in Oblivion, I actually mean in it. If you're ever noticed whilst playing Morrowind that Daedra Lords always have Dwaven weapons then you'll understand why I think the Dwarfs might just be in Oblivion.
I agree with you about the complete revelation of the dwarven dissapearince never being fully explained, but I don't think you'd feel so bad about bringing de-existence to an entire race if your original idea was just to put them all to the sword.