Welcome, if you haven't already, http://media.photobucket.com/image/fishy%20stick/Merik2013/fishystick.jpg
1. Actually, we tend not to get this a lot. The mechanism involved is really complicated and I'm falling asleep here, so I'm not going too deep into this. However, what Dagon did was he poured some of his power (and by extension, his soul) into making the Mysterium Xarxes. It then could serve as the anchor keeping Paradise from being washed away by the (figurative) Waters of Oblivion. Then Mankar Cameron served as the channeling force which shaped and stabilized Paradise into what you see it as. So Mankar did indeed 'create' and hold dominion over Paradise and it was indeed granted to him by Mehrunes Dagon. However, I'd describe it more as subletting a pocket-world than creating. The process was more a way for Dagon to better directly control Cameron than some kind of personal whimsy.
2. Notes on Racial Phylogeny is the only shred of lore on the stuff. I'd guess, just like real inheritance, the traits expressed are random. Although we can hazard a guess. The Grey Prince had an Imperial Father and an Orc Mother, and he presented as a pale orc, though one may argue the father's vampirism also skewed results. I'd wager that the effects of the father are more internal. So an Altmer father might pass on his deep reservoir of magick to his offspring. But who knows.
3. We spend a lot of our time talking about the stuff around this issue. Symbolism in the ES world is a very powerful thing. It can literally destroy nations and gods. So without going too deep into the issue, yes, the more symbolic power someone has, the more mythic status they wield. There are caveats and exceptions attached to that statement, but generally that's true.
I'm don't know how much lore you know, but if you're interested in more, I recommend http://www.imperial-library.info/ for further reading.