whats the difference between construction set 1.0 and 1.2.404? And do I need to download both or can I just download 1.2.404?

Lots of fixes is the difference (and more stuff broken, to be honest.)

The CS you use depends on the version of the game you have installed.

1.0 can make .LIP files. That's all I've ever used it for... Unless you intend to make dialogue, you should only need 1.2.

And if you are going to be adding mods should I download just the 1.2 version? I didnt really use the CS in Morrowind but had to open it a few times for some mods.

Just download the 1.2 CS with the Construction Set Extender. Fixes the lip file issue. And you cannot open any mods (including the official DLCs) that are made with the 1.2 CS in the 1.0/1.1 CS, without hacking the file open with a hex editor.