why did all the 'gods' and other Daedric Princes just stand by and watch him? Are they all 'evil' or what. Forgive me I am no lore buff.
Who do you think ultimately stopped Dagon?
I believe Akatosh had something to do with it based on the following UESP quote:
The Amulet of Kings is infused with the Dragon God Akatosh's blood, and as Martin is a part of the Dragonblood, he may be able to use his joined blood, the Amulet, and the power of Akatosh's Temple to summon the power of the Dragon himself. He bids you farewell, gasps a thanks to you for all that you've done, and rushes atop the altar as Dagon smashes through the rooftop. Staring down upon the last Septim, Dagon menaces him, and Martin stands against him, unafraid. Suddenly, beams of light burst forth from Martin as he shatters the Amulet, and transforms into a gigantic, flaming dragon. Dagon and Martin - now the Avatar of Akatosh - clash, the two immortals battling for the fate of Cyrodiil. Finally, Martin swoops down and buries his jaws into Dagon's neck, wounding him, and finishing him off with a breath of holy fire. Dagon falls, his physical form banished and the Oblivion Gates closed. Martin, however, pays the ultimate price for borrowing the power of Akatosh: He turns to stone atop the Temple Altar, an eternal monument to him.
If you mean why did none of the other Divines or Daedric Princes intervene earlier, good question.