Oh, the latest Nvidia driver. That could be the problem. Nvidia are notorious for making things worse with every update, and this one's no exception.

I was having real problems with it.
I suggest going to nvidia.com and searching for "45.23". Download the one for Windows 98. It's an old reliable driver that works very well in my experience

NOTE: This is only if your card is GeForce. But they're really the only ones that are around now

if you have a Quadro or a Riva (which are pretty old methinks) chances are it wouldn't run Morrowind anyway.