The "Mystery of the Dwarves" have pretty much been solved by the fandom, though it's not officially stated.
Basically, Kagrenac used the tools Sunder, Keening, and Wraithguard on the Heart of Lorkhan, in an attempt to create an artificial god and/or turn the Dwemer to a pre-creation state. He, unfortuantly, miscalculated, and instead caused all Dwemer living on Mundus/Tamriel at the time to crumble to dust, and their spirits fuse to the Numidium.
this. Add to it the only living Dwemer left at the time was a transdimentional tonal mage or something, came back to Mundus and spent his remaining life looking for them, in nearly every plane of existence and still found no trace of them, finally contracting corprus and ending up with good ol' magister Divyath Fyr, and even he, a 4000 year old Telvanni wizard, who could clone versions of himself into "daughters" said the same.