I didn't edit the ini because I don't know what ini to edit, nor where it lives.
Finally, something I can help with!!
I'm running on Vista but I think Windows 7 has the same annoying habit of hiding your ini file and a lot of saves from the game. Let me know if it helps!
Head into your Morrowind folder (C drive, Programs x86, Bethesda, Morrowind)
From the Morrowind folder, look up at the tab under the gray File-Edit-View-Tools-Help bar. It should be dark blue with Organize, Views, Burn, and Compatibility Files.
Click compatibility files. This should give you a cleaner collection of files and folders. This is also where you will find all your actual saves in the event you decide to back up saves or delete them. You will also find screenshots (when enabled), a warnings.txt file, and all your mods... And your ini.
The ini is called Morrowind, but its labeled as being Configuration Settings. My icon shows a piece of paper with a cog on the lower-right corner, for example. Right click and save a copy on your desktop or in a folder somewhere on the off-chance you mess up somewhere.
The ini should open in Notepad or WordPad. It will start off with something like this:
[General];Test TES 0=morrowind.esm;Starting Cell=Pelagiad;Starting Grid X=0;Starting Grid Y=0
Under this line (you can use Control F and type in ;-1 Use raw to find it if you skip over it) is where you'll be changing things:
;-1 Use raw data, 0 Use Newer, 1 use Archive OnlyTryArchiveFirst=0
AllowYesToAll may be there under AllowYesToAll=0. If so, change it to 1. If it isn't there, you can add it. It should look like this:
;-1 Use raw data, 0 Use Newer, 1 use Archive OnlyTryArchiveFirst=0AllowYesToAll=1
This is important: click save, NOT save as. As Notepad/Word Pad doesn't have .ini as a format, it won't save. But clicking the basic Save icon (Control-S) works fine. Don't ask me why that is.
Now, when errors appear either in Morrowind or in the CS, there will be another option and a note in the message box telling you that Cancel is Yes to All (keep going). That's the option you want.
Did that help?