but Dragons would be challenging, if the Dragons were evil
Please re-read.
Don't you guys get it? The dragons are really huge allies of the empire, HUGELY significant being in Imperial beliefs, and are near-divine! Killing one would almost be like a step down from killing the actual emperor! The reason why Cyrus was able to get away with it, was because he was a fugitive of the empire in the first place. No dragons. None.
1) According to Imperial belief (and I believe Nordic as well; they couldn't look upon Talos without seeing a dragon), Dragons are holy creatures worthy of utmost reverence. They are not considered "evil."
2) According to http://www.imperial-library.info/mwbooks/famed_artifacts.shtml, the Fang of Haynekhtnamet was pulled from a beast of the same name, of a dragon-esque species called the Wamasus. It took 20 northern men 7 straight days and nights to kill the creature. What makes you think your hero, no matter how powerful, will be able to take down the real thing one-on-one?
EDIT: Quote from http://www.imperial-library.info/dogate/es_weaseling.shtml, from section entitled "Why are there no Dragons in Morrowind?"
Some say the dragons moved on closer to Cyrodil, where they gained shelter and security from the Empire, along with dragons from other parts of Tamriel. Dragons are very sacred to the Empire, and as long as the Empire protects the dragons, the dragons MUST offer services to the Empire, such as aiding and protecting the Imperial forces in war (Redguard, the fight for Stros M'kai).
Just a little "in the know" for those who are curious about dragons. They DO exist, just not everywhere. Even in Cyrodil, where the majority of dragons may be, they are scarcely seen. Could it be they can shapeshift and use human form?