Even the geographical layout of Morrowind was genius. There was no need for invisible walls because you were on an island. Much of the island was inaccessible by fast travel, and many places were so mountainous or hilly you'd never know that Pelagiad would be within spitting distance of Seyda Neen without levitation. And also, the fog (much maligned though it was) often helped to enhance the mystery and add apparent size to the world. I play with a graphical mod right now with a huge view distance and no fog - I had no idea you could see Ebonheart from pretty much any of Vivec's east-ward (or was it westward?) facing cantons. In my mind I always imagined them as being much farther apart.
So in conclusion I think that Morrowind has Skyrim beat on pure world design, even if it is a step-up from Oblivion.

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