Okay. So people are going to think I'm crazy. But I remember an exploit in the game that allowed you to put spells on yourself/create scrolls with unlimited enhancements on skills... Well my brother and I made one that amplified agility by like ten million or something crazy and then we jumped.... We stayed in the air for what seemed like a million years and then feel back down to the world. Only we landed in water, and in no part of our decent did we ever see the surrounding lands. When we hit the water we saw dozens of dreughs and a castle underwater. A straight up castle. This was on the console version, a few months after the game came out. It wasn't GOTY edition either... But we can't find our way back there! No searches return what I'm looking for either... But I KNOW we found it.

Unless I am completely mistaken, you couldn't find it again because that underwater palace is randomly generated by http://www.nexusmods.com/morrowind/mods/42417/? in deep water.

See http://static-1.nexusmods.com/15/mods/100/images/42417-2-1360073199.jpg of what I believe you are referring to.

But the OP says he played on the console version. So Abot's mod seems an unlikely suspect, does it not?