Are there any legal issues, if someone wants to use Oblivion items in a Morrowind mod?

I know there are some nif file issues - easily fixed, and a new file format - .spt for trees. But could a modder use something like a Lady's Smock plant in their mod?

Yes there are legal issues if you use original Items from OB in MW & release it to the public.

If it is a OB mod with scratch made parts that are not just modified original OB Items then yes.