I've played Morrowind to death and I'm level 21 in Oblivion, but I have never used the Dispel feature, and I must admit I don't even know what it's for. What is it for?
Yes, dispel removes ALL magic effects. With a fireball, you'll stop taking damage. If it was damage 10 points for 5 sec, hit dispel quickly and your health stops dropping.
I use dispel to cancel silence more than anything (silence prevents you from using magic - dispel allows you to use magic).