There's something about the Steam version that makes the Program files/Steam path work OK. I could not get MW to work (CD version, Win7) in Program files(86) but no problem with the default Steam install.
Yes it does has something to do with Steam, because it depends
where you install Steam client and if you install Steam client on the default path then you have trouble with Morrowind. :user:
I always install Steam client on the different partition and not on C:\ problem solved.