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 don't believe Azura herself did actually do anything to the dwarves personally. To me Azura is more of a manipulator than someone that takes direct action. While pure speculation.. I believe ultimately the dwarves were de-created so to speak. Since it does involve the heart of Lorkhan who was an Aedra(those responsible for creation). If Azura had a hand in it is was probably in manipulating Kragnec into thinking his actions were for the good of the dwarves and he realized it too late.