Maybe they stole the power of from the Daedric Prince Lorkhan or w/e his name was to enchant some super powerful sword and as a result someone used it to hit the ground and it sank or something like that. It doesn't make any sense to me how you can make a continent sink by a sword fighting technique.
Definately not. I guess it would be possible, but I am most definately against it, being the Ansei are beast. Supposedly, like Lady Nerevar said, the Redguard practitioners of Shehai got in a civil war. It got so bad they decided to end it with the unthinkable, splitting the atom(os) with their most secretive, uber technique. It blew up, killing thousands and destroying their home. The ansei probably all died out, or were killed by survivors to prevent that from ever happening again, and then they came to Tamriel. (Or, as she said, they didn't use it to end the war, but could've done it after. Anything is possible when little facts are available)
Where's the Pankratosword now?
The Pankratosword, I believe, was not a weapon, but a technique. I gather this from the fact Lady Nerevar called it "Performing the Pankratosword" as opposed to using it. So, that would mean the "sword" aka the technique, died along with the Ansei. If a practitioner of Shehai lived, it is possible he/she could do it again, but the secret could have been lost forever. Of course, it could be re-discovered, and that'd be dangerous.
PS Don't trust me on this, but I'm thinking you could equate this to the bombing of Hiroshima in WWII. Of course, Japan didn't sink, but the similaritites of the weapon sound similar. I'm not saying this as a conspircy theory, those are too abundant to talk about, but just to help you remember that the Pankratosword was like nuclear fission, not the actual bomb, I'm sure the use of such a technique, if only used once in recorded history, the technique would be synanomous with its use. Trying to think of an example for that...
Thanks, and never trust what I say, because everyone is wrong. Always.