He once tried to attack Kvatch, but was beaten back. Dagon's invasion of Kvatch was not because of any potential enemies there, it was revenge.
Why would he attack a city that once defeated him? Martin has nothing to do with it. He was just angry. Why was he angry? Because he's fυcking Mehrunes Dagon. You can't expect much tactical thought to come from the god of destruction, especially if he's having a bad day.
And why would Daedra not be able to walk on holy ground? They're extra-dimensional beings, not demons. For the record, Dagon himself never physically came through the Kvatch Gate and tore up the city - the only mentions of the events of the siege make it clear that it was a siege engine, and probably several Daedra, that did the damage.
Is it not possible for Dagon to have more than one reason to attack a city? What about revenge
and____________ (insert theory/wild guess here)?
And honestly, as long as you take out certain theological trappings, then "demon" works as well as any word (okay, better than many words), in my opinion. :shrug: extra-dimensional, time-traveling demons - just like most everything else in this universe, apparently.