I have always thought of Oblivion as a sort of other dimension. But after reading the Oblivion section of the 3rd PGE, I am once again confused as to what exactly Oblivion is? Is it the outer-space that can be seen from Nirn? I thought that this was just the heavens of Mundus. But is Oblivion a physical place or just a dimension beyond Mundus?
The standard answer goes something like this: "http://www.imperial-library.info/content/oblivion."
Regarding your question about whether Oblivion is a separate plane of existence or the space surrounding Nirn or some sort of physical place: it is all of those things.
Another good book to read is http://www.imperial-library.info/content/doors-oblivion.
Also, what is Aetherius and how is it different from Mundus/Nirn?
Aetherius is a plane of pure magical energy beyond Oblivion. Magika enters Mundus from Aetherius through the Sun and stars, which are holes in Oblivion created by the departure of Magnus and other et'Ada.
the Tamriel version of Hell, it is where the Dremora reside... you should go to Elder Scrolls WiKi for your future questions, all you need to know is there.
Bad. Just bad.
EDIT: Right. Ninj'd five times over.