I always dislike reading over my old posts and realizing how I could have worded things better...
But if he's dead, how can he dream? And could another person do the same thing, like if Vivec were to be dead could he "dream that he lived"?
Think of it like this. First, make a dichotomy between the literal world and the dream world, but both are real. Now when you go to sleep in the literal world your mind enters into the dream world, you manifest a body within your dream and go about as you like, easy to understand. Now, reverse the process, what happens when somebody who's primary world is the dreamworld world dreams? Just the opposite occurs, they manifest a body within the literal world and go about as they like.
Now we'll give names to those worlds, we'll call the literal world Mundus and the dream world the Dreamsleeve. The defining qualities here are that the Dreamsleeve, apart from just being that dreaming world, is also where spirits of the deceased go to be recycled (ie, slowly purged of their individuality while they experience the afterlife of their belief). This means that, upon death, the dreamworld becomes those people's primary world. Most of them dream about some afterlife in Aetherius or Oblivion and slowly fade away. Dagoth Ur however is the one that dreams from within the dreamworld, he is "the dream-sleeved inversion" - he died, and now from within the dreamsleeve he dreams that he lives and he's just powerful enough to make it happen.
How so? Isn't the Dreamsleeve just souls, with souls being distinct from ghosts.
I remember talking http://www.gamesas.com/index.php?/topic/1076801-where-is-the-dreamsleve-and-is-it-for-daedra/page__st__20__p__15680226entry15680226 about the difference between a soul and a ghost. I'd be inclined to agree with you, a soul is pure spirit, while a ghost is a soul which is animating ectoplasm.
Going off Hyamentar's statement though, which brings up an idea I never though of before, perhaps some ghosts are similar in this sense to Dagoth Ur. In TES when you die you get the afterlife you believed in, ie, you dream and experience Aetherius, Sovrngarde or whatever while your soul is slowly recycled; in Dunmer religion the afterlife is one of watching over your descendants. Now what if we assume that the Dunmer afterlife is just another one of these dreams of the dead within dreamsleeve?
The Dunmer spirits are dreaming within the dreamsleeve, like everybody is doing in the dreamsleeve, the difference is that they're dreaming about the real world. What if that's what ghosts are, souls in the dreamsleeve which are dreaming their afterlife out, this would explain why they seem to slowly lose their memories and go crazy as ghosts, their souls/individuality is being wiped clean by the dreamsleeve. Unlike Dagoth Ur however, they're not powerful enough to manifest solid bodies, or even semi-solid bodies, without the aide of substances such as ectoplasm (which I don't think we've ever delved very deeply into what exactly ectoplasm is in TES). Maybe that's why Nibani Maesa didn't seem awestruck by the fact of Dagoth Ur being 'dead and dreaming', she's used to the idea, just not on Dagoth Ur's level.
In this line of thought Dagoth Ur's uniqueness is in his connection to the Heart coupled with a special understanding of the nature of the world (which I mentioned originally in terms of 'false symbolism'). Ghosts would just be souls which temporarily reconnect to Mundus to experience their afterlife. Dagoth Ur however took it a step further and made his manifestation a permanent, solid, corporeal thing, immune to the erasure/recycling; he truly 'inverted the dreamsleeve' and was working on making his dream the
one dream, on exercising the power of lucidity in the literal world. For him, the dreamsleeve was reality, the 'divine dreamworld'.
As I alluded to in the OP, perhaps this is the inversion of CHIM (because ya' know, no conversation is complete without it)... hopefully I haven't contradicted anything I said before, I haven't really checked.
Reading through the OP through made me think about something...In-game, does Dagoth Ur even leave a corpse when you kill him? I can't seem to recall if he does, I just assumed he fell into the lava as the platform collapsed (I'm talking about when you destroy the heart when he's still 'alive', not actually killing him)
No he doesn't. He just fades away. I did an experiment once keeping him off the bridge (since I run the Great House Dagoth mod he is passive). When I stepped off the bridge after freeing the Heart, he vanished.
Yea, he just sorta dissipates in a shower of sparkles leaving no trace (its actually the same animation from the first time you kill him). Its rather odd in and of itself. The only other creatures I can think of that fail to leave a corpse are Dremora and ghosts, Dremora because their bodies proper reside in Oblivion and only create temporary vessels here (at least in Morrowind), ghosts because they are simply animated ectoplasm and so have no body to leave - but even still, both of them at least leave a trace of their existence, Dagoth Ur just disappears. The only reasonable conclusions are that he either didn't die but was rather transported away like the first time you 'kill' him, or that his body was truly incorporeal.
His body was no more real than your body is when you're dreaming. If you're killed in your dream, the dream ends and you likely wake up, but what happens to your dream body? Generally it disappears with the rest of the dream. But what if the rest of the dream didn't disappear, if the dream kept on without you? Your body dissipates into nothingness because for that dream you're no longer there to sustain its reality, that is, the realness of your body.