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After the ancient Nords came to Tamriel, lead by Ysgramor, they set to eradicating the local Falmer. At the time, Falmer were proper and intelligent surface Elves, just like any Bosmer or Dunmer or Altmer.
The raw strength of the invading Nords proved too strong for the unprepared Falmer of Skyrim, so they sought refuge with their elven cousins, the Dwemer, in their underground strongholds.
Little did they know the Dwemer had something terrible in mind for them... They fed the Falmer toxic mushrooms that blinded their eyes and muddled their brains, devolving the entire race into animal-like cave monsters. Think about it, the Falmer we fight in this game have white souls, trappable in any old soul gem. The Dwemer gave the Falmer a far worse fate than the Nords would have. To utterly destroy their sentience, their intelligence, their lives...
But why would they do this, you ask?
Convenience. Dwemer machines run on Soul Gems.
No wonder they up-and-vanished. That, combined with the fact they were trying to steal the power of a God (Lorkhan), would anger any deity with their finger on the "blow up dwarves" button.
The SAFE was slain in battle. A great flaming nautical pyre carries it off to VAULTHALLA. www.youtube.com/user/Terrafuror - Gimme a view, sweet cheeks ;)
Well, they were a vile race, but they didn't disappear through divine interventions. It was their own machinations, using the Heart of Lorkhan to become one with Numidium, i.e. a Brass God that defies the laws of time. Or, as I like to put it, pisses in Akatosh's eye.
I didn't edit my sig this time, but I'm trying out the sig rotation thing.
What the Dwemer did isn't unheard of even if our world. Colonial powers kept slaves and cut their hands off as punishment and whatnot. It was terrible, but it doesn't make an entire group of people "monsters". So the Dwemer weren't monsters. If anything, their leaders were. And one could argue the Dwemer saw themselves as vastly superior to the Falmer, to the point where they saw the Falmer as insignificant beings fit only for hard labor. It doesn't justify their actions but it gives them motive for having turned the Falmer into a slave-race.
Either way, I've never been a fan of the Dwemer anyway. They remind me of the Altmer, which I hate. The only cool things the Dwemer had were beards.
I meant that even in our world, people have turned other people (as in, large populations/civilizations) into slaves. And when these people failed to do their labor, they'd get punished in terrible ways that included cutting their hands off. Of course TES adds its own fantasy twist to the concept, but what they did has (sort of) been done in our world too. We don't condemn entire modern civilizations for the actions of few.