Spoiler Vvardenfell is a big crater filled with water.
From what I've seen (yet to read the books myself) it wasn't a Plinian (explosive) eruption akin to Krakatoa, but a more drawn-out Vulcanian eruption, or more likely a widespread Peléan eruption. It described much of the island's surface as "destroyed," but given the massive volume of Vvardenfel and Red Mountain, obliterating it all to below sea level would've filled an ocean, well beyond the capacity of the Sea of Ghosts.
At least, judging both from in-game scale measurements as well as map conversions, Red Mountain had, near the end, a peak height of somewhere around 55,000 feet. (16,800m) Like most volcanoes, one can presume that its height grew over time as material built up. It also had a (once converted from scale) surface area of around 50-60,000 mi2. (130-155,000 km2) Obliterating (or even substantially changing the topography of) Vvardenfel would've required an eruption well, WELL past any explosion in recorded history; given the http://en.wikipedia.org/wiki/Volcanic_Explosivity_Index is logarithmic (each step is a full order of magnitude above the one below it) such a blast would have to rate as a 9 or possibly a 10, when human history has never witnessed anything beyond a 7. (and Krakatoa was actually a 6)
in which one of the women talks about "going to Mournhold". Small hope, heh?
I'd doubt that Mournhold and the city of Almalexia would've been wiped entirely off of the map. The eruption was only said to have devastated Vvardenfel, and the capital wasn't even on the shores near it. And after all, the city had been razed before, with a new one built on top of it.
That, and given how the destruction was implied to be limited JUST to Vvardfenfel, it's likely a number of outlying parts survived. Mostly, these'd by on the outlying islands of Azura's Coast and the Sheogorad; especially, I'd imagine, much of House Telvanni's property both there and across the sea in northeast Morrowind would still be there.
I still think is strange, I completely get the Argonians invading but holding on to land? How did they manage something like that? The Dunmer should be more then capable of kicking the Argonians back, even in a weakened state.
I could actually readily see this, especially given that the Dunmer lacked the aid of any of the Tribunal; it was largely due to Vivec's leadership that a combined force (including argonians) was soundly defeated in an invasion attempt of Morrowind in 1E 2920. Without any assistance, and thrown into chaos, they'd be at a severe disadvantage against the Argonians, who were also masters of combat in swampy terrain, as was evidenced in the latter part of the second century 3E in
The Armorer's Challenge. One must remember that while Vvardenfel might be mostly ash plains, southern Morrowind, where the bulk of the dunmer lived, was rather swampy.