One of the several contradictory versions of what happened at Red Mountain written up in Morrowind (the one that was in the Ordinator's secret library?) claimed that Nerevar and co. summoned Azura when they'd secured the heart of Lorkan, and she showed them a ceremony to perform that would disconnect the dwemer from the heart. They did that, and all the dwemer everywhere suddenly crumbled into piles of dust.
I always felt that that sounded like the the most plausible explanation to me. No direct displays of daedric power by Azura, just information and mis-direction (I'm not sure that Nerevar would have done the ceremony if he knew it would have killed all the dwemer, given his feelings towards them. Defeat them, yes, genocide them...)
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