What is the maximum amount of npcs on screen? For example: In a mod I'm working on there will be two major battles. How many npc's can I put on screen before Morrowind crashes?

I guess it really depends on the individual's computer stats. For instance, mine is very, VERY old. Probably like 20 spread out, not all together in a single area. And some have to be idle otherwise too much movement would crash me.

What is on the screen doesn't really matter. But how many in the current loaded cell is what's important. (the game renders all things in a cell, not just what is "on screen")
It does depend on computer specs, but NPCs (and big scripts, and Lights) seem to be the most demanding on the engine, regardless.

I think 25 NPCs (and the scripts for them to fight each other) might be a lot. But start there and see how it works. Test all sorts of scenarios and see how the FPS is.
You can always make a "Lite" version that makes the battles smaller for low end users.

Doing a battle in an Interior would probably be easier, too.