http://www.uesp.net/wiki/Lore:Dwemer
Kragen is probably not a place, but a person. Kagrenac is the most famous member of the dwarven/dwemeri race. He was chief total architect in Vvardenfell, and may be to blame for the disappearance of his race. None-the-less, it was in his presence (dead or alive) that the Heart of Lorkhan was tinkered with and the Dwarven race reduced to ashes in mere moments.
While Kragrenac most probably had no hand in the construction of Fang Lair, he is, as I said, very famous and probably one of the few Dwarves known by name throughout Tamriel. Think of it as saying "The Colosseum was originally built by the people of Caesar" or "The Empire State Building was build by the people of Washington." These men---Caesar, Washington---are the subjects of many folktales and are easily recognizable by a illiterate, un-educated populace. Even if they aren't familiar with the civilizations that they were a part of. The author is simply trying to appeal to that, I think.
Legend has it that a Great Wyrm drove the Dwarves from their home in the Dragon's Teeth, and took the Lair for itself."
A blatant Lord of the Rings/Hobbit reference, and probably retconned. Still, its not unthinkable. Dragons used to be more common across Tamriel. And they had to live
somewhere.
And I don't think it has anything to do with the Akaviri. Think about it: That dragon statue/symbols could have been added at any point in the hundreds upon hundreds of years following the disappearance of the Dwemer.
I just want someone to help me understand this. Does all this already connect with established lore or is it just an early series mistake?
IMO, the entire design presented in Arena has probably been retconned. That means, no dragon statue(s), no stone tower.... Fang Lair probably much more closely resembles the Dwemeri ruins in Redguard and Morrowind.