When holding a torch, the sound is really loud and unnecessary. Is there an .ini tweak to reduce the volume, i can't find it.

As far as I know, the INI sound setting would effect all sounds equally, not just torch noise.

To make the torch noise quieter on it's own, you would have to replace the "torch noise" sound file with a quieter version.

Try looking on PES, or TESNexus, for a sound replacer mod.
There might be one that does this, but I don't know if there is or not, so I can't point one out to you, sorry...

Would it be possible to edit the sound yourself? Any simple sound editor could do the job.

You actually have a couple of options.. First, you could open the construction set, click on light tab in the option window, and scroll down to the torches. If you open the torch, you will see the bottom left button says "fire 40". If you click on that button and don't replace the sound, the torch will have no sound at all.

Alterrnatively, you could go to "gameplay">sounds and find the fire 40 sound file. You can then try to reduce the sound the volume control field, but I won't guarantee how effective that will be. There is a trick to volume, but I can't remember what it is right now.

Or, as already suggested, you could download a free sound editor like Audacity and edit the volume in a new sound file.

EDIT:
Oh, you'll need to save the change whichever way you go as a new mod check it in data files on the game menu.

Weird... the web page somehow added a link to my post... so I took it out.

Hrnchamd has fixed a few loudness issues in the Morrowind Code Patch (like heavy armor hits), maybe it fixes the torches too if it's really a bug?

Could you link me to that mod please? I'm interested. I tried a search on the TESNEXUS and PlanetES but couldn't find it