My Framerate drops from 40 to 20 when casting a restore health spell in first person.
I didn't have this when I played Morrowind before. I can think of a few things that have changed since then:

• I'm using ATI Tray Tools
• I'm using Morrowind FPS optimizer
• I'm using Morrowind Graphics Extender
• I enabled AA
• I enabled Quadratic Lighting in the morrowind.ini

I don't think it's the quadratic lighting because it still drops a lot when it's off. It could be some kind of ATI Tray Tools option, I don't know.

How many restoration effects does the spell contain?
I don't think it's either Tray Tools or quad lighting, as I have both of those running and haven't noticed an obvious drop. I'd say:

Make sure you're in an area that has a stable framerate, but still has the restoration drop.
Run morrowind without FPS Optimizer, and with AA disabled.
---If the drop disappears, test with FPS Optimizer, and keep AA disabled.
------You now know the cause.
---If the drop doesn't disappear, try turning off quad lighting, as uninstalling MGE is more complex.
------If this doesn't eliminate it, turn quad lighting back on, and disable MGE. See if it's fixed...

It had just one effect. It was hearth heal.
I found out it was the AA. Now i've turned it of my framerate is also more stable, which means that the fps optimizer doesn't constantly increase and decrease view distance, which was a bit annoying. The graphics are now less smooth, but at least the rest is. I like a high framerate over good visual quality anyway.

Thanks for the suggestion. My evil mage is now going to sell his soul to the devil...