He fell in Red Mountain the same way Julius Caesar fell in Rome. As in, died there. His corpse was turned into a Bonewalker, which was a great honor.
A bit of clarification here?are bonewalkers merely flesh and bone reanimated, or are they the person's entire being reanimated (in other words, a body bound to service, or a soul and body bound to service)? If it were the former, it doesn't seem like any kind of great sacrifice that would merit honor, and were it the latter, wouldn't that mean the whole Nerevarine prophecy was false from the beginning, as Nerevar's soul had never left the world, but was instead still bound to service upon it, preventing any sort of recycling, be it by Azura or mere chance? It certainly could have just been Azura's manipulation of events and appearances, but Vivec seemed to acknowledge the player as the Nerevarine, which would be a bit odd if he knew it to be impossible.
"Why did I try to kill you? Because you threatened the faith of my followers, and I needed their faith to hold back the darkness. And I thought you were my enemy -- a pawn of the subtle Daedra Lord Azura, or a pawn of Emperor Uriel Septim, or a simple fraud -- perhaps a Hero -- but not much of one if my faithful could destroy you. Now circumstances are altered. I need you, and you need me."
I suppose, though, that he could have just been acknowledging a need for one such as the player, which would explain things. Of course, come to find out, my conception of the bonewalker will most likely be wrong, making the whole point meaningless. But we must learn somehow, and by mistake is as good as any other method so long as it doesn't kill you.