http://www.uesp.net/wiki/Lore:Dwemer
Before quitting this subject, we might as well address the oft-used misnomer for the Dwemer, the "Dwarves." There is nothing to suggest that the Dwemer were any less towering over humans than the early Aldmeri were; indeed, extant Dwarven goldmail more or less fits every human lucky enough to possess it. Imperial excavation of ancient and wondrous Dwarven machinery supports the Dlyxexic theory that the translation of Dwemer as "Deep Elves" might instead be read as "Smart Elves," despite the incongruity of that notion. Perhaps, then, the "brilliant students" of the titanic Ehlnofey mentioned in the Anuad are the Dwarves, and that their giant masters gave them this sobriquet.
http://www.imperial-library.info/content/pocket-guide-empire-first-edition-hammerfell
The name "Dwarves" is used mostly by non-Elven races and has misguiding connotations. There have been rumors that the name "Dwarves" was given by the Giants that lived in Morrowind when the Dwemer first lived there. Thus (possibly) the confusion. A variation on the rumor suggests that the ancestors of Men and Mer, described as the "titantic" Ehlnofey (also known as the Earthbones), named the Dwemer. In this model, the name is actually a play on words, implying both shortness (relative to the "titanic" Ehlnofey), and intelligence.
[...]
The most referenced possibility is that "Dwarf" is simply mistranslation of Dwemer, and that it's proper use is in the "Deep Folk" sense, but that Dwe was mistranslated by humans into "Short". Thus "Short Folk", or Dwarves.
http://www.imperial-library.info/content/definitive-guide-dwemer#2 (the direct links to their sources are dead apparently but i didn't want to use UESP)
actually they are dwarves who were originally from morrowind, but also in many other places including highrock and hammerfell.
you're almost right on this one
dwarves are thought to be a close relative of the elves since their lifespan is much greater than humans.
uh