Okay thru the times I have played I have noticed something. On some playthrus with certain characters, the npcs not the daedra but the reg npcs u see hanging around will talk with me and such andb then do theirbown thing. Then on some playthrus with other characters, the npcs will attack me.

Are they linked to a reputation system, at a certain lvl, or is this a bug wherevthey are ALWAYS supposed to attack me?

Fight setting is dynamic, which varies with your distance from NPC, NPCs disposition, NPCs original fight settings.

Most of the NPCs outside daedric ruins and some rogue ashlanders have fight set to 80. So if you don't have good personality and/or highr reputation, they attack.

http://www.uesp.net/wiki/Morrowind:NPCs#Fight should give you general idea when an NPC may attack.