A few things need to be cleared up in this thread.
Fact: The Dwemer are not really dwarves. They were as large as any man/mer and that's why you can wear their armor without problems. "Dwarf" is a misnomer that was probably initiated when some giants originally met the Dwemer in the merethic era or some such.
They are, however, refered to as 'Dwarves' by Imperials and in texts throughout Tamriel. It's the name the Giants GAVE them. It is not their true name. Just as Dark Elves are actually call 'Dunmer' or High Elves 'Altmer'.
Dwarf does not mean 'short' in Tamriel. Not in the way we use it.
Fact: The Dwemer are presumed dead, but they might not be. Apparently they all vanished about 700 years into the first era (well, all but http://www.uesp.net/wiki/Lore:Yagrum_Bagarn). No living mortal (in Tamriel, at least) has seen them since, but they might still be alive *somewhere*.
No. They were absorbed into the Numidium. It's all detailed in Morrowind. It happened when they tried to build an artificial God to change their place in the order of the world. They disappeared because when it was switched 'on' it absorbed the whole race into it. And then Broke.
Technologically advanced though they were the Dwemer's innovations actually resulted in their (Near - bar one) extinction.
Fact: The Dwemer are generally bearded, but that alone does not make them elf nords. Whereas nords are a race of men who hold honor and battle prowess above all else, Dwemer are scheming, intelligent, advanced, objective dwellers of the underworld. They do not appreciate honor in the traditional sense and apparently value mechanical, technical, and arcane ability over most other practices. They are generally considered heretics and blasphemers by the other races because they do not follow any of the divines nor any of the Daedra. At one point, they tried to make a new god from the remains of the divine Lorkhan (which, incidentally, may have been the cause of their disappearance).
Correct. But who the hell said they were Nords?