A lot of things actually don't make much sense in Oblivion's Oblivion. Why did Dagon not come and personally kill you when you where in your first gate near Kvatch? I mean, when someone is killing hundreds of your minions, you tend to be a tad concerned.
He's the Prince of Change & Destruction. If he killed you, then Martin would have died, if Martin died then Dagon would have destroyed the world, if he destroyed the world, there would be nothing left to destroy since Daedra never die. And thus, he would cease to exist. Destruction is an important part of Change, which Dagon is also the Prince of.
It's possible he was incapable of killing you because that would have resulted in a chain reaction of him not having purpose any longer.