You're leaning too much on Nerevar at Red Mountain. None of the accounts of what happened are very consistent and none of the observers are very qualified. It's pretty much a dead end.
Rather look at the general tendencies of Mer. In the Dawn Era when Mundus was made the gods had to life on through their children, each generation there would be more but they also were weaker. The gods degenerated. At the end of the convention Auri-El, King of the Aldmer ascended into heaven for all too see.
Afterwards Aldmeris broke because noone could agree on the exact way to reapraoch heaven. Each believing that what they had witnessed was true. Such is the nature of the Dawn Era. See the Intercept for more.
The Dwemer have depiction of Auri-El's ascension in the Ruins of Kemel-Ze and the Book, Egg of Time shows the Numidium doing the same thing. This is where you can apply both Xal and Baladas. The Dwemer sought to reverse the process of creation, reunite and escape Mundus.
As for why Kargrenac pushed ahead anyways:
The war with Nerevar and the Dunmer may have led Kagrenac to carry out his experiments prematurely. Although this book argues that nothing disastrous could result, the disappearance of my race argues otherwise. - Yagrum Bagarn
As for why it failed:
This old prayer made the netchiman's wife smile and begin such a deep sleep that when Dwemeri atronachs returned with cornered spheres and cut her apart she did not awake and died peacefully. Vivec was removed from her womb and placed within a magical glass for further study. To confound his captors, he channeled his essence into love, an emotion the Dwemer knew nothing about.
The egg said:
'Love is used not only as a constituent in moods and affairs, but also as the raw material from which relationships produce hour-later exasperations, regrettably fashioned restrictions, riddles laced with affections known only to the loving couple, and looks that linger too long. Love is also an often-used ingredient in some transparent verbal and nonverbal transactions where, eventually, it can sometimes be converted to a variety of true devotions, some of which yield tough, insoluble, and infusible unions. In its basic form, love supplies approximately thirteen draughts of all energy that is derived from relationships. Its role and value in society at large are controversial.'
- Sermon 3
The Dwemer did not know Love, also see the http://www.imperial-library.info/obscure_text/5th_era_loveletter.shtml.