The beginner's Guide to Daggerfall has this to say about this kind of quest:
"...You may have heard of ..." or "It falls upon us to investigate the claims of ..." (any rep): a confusing quest, at best, with many possible outcomes. It also tends to hang up a lot on my system. Save the game after accepting the quest and follow the instructions that come up for you. Sometimes it involves dungeon crawling, sometimes not.
Yeah, I find it confusing too. I'm supposed to meet woman X at Tavern Y in town Z. Woman X tells me to investigate some merchant P in Town Q that knew the prophet previously. I go see said merchant, and he tells me to go tell woman X that he's not the guy. I go back to X, but she won't talk to me when I try to activate her. How do these quests normally go? Should I just start visiting all the people and places mentioned so far (like the dungeon where the alleged miracle happened) ?