Board Thread:Lore Discussion/@comment-24760123-20150811175133/@comment-92.7.30.157-20190412114941

Dagoth Ur is the False Dreamer (Sharmat) because his experience of divinity via the Heart of Lorkhan convinced him that he was the Godhead, the entity which dreams the entire Elder Scrolls universe. Writings can be found in some of the dwemer ruins that show the servants of Dagoth Ur to believe this, calling him 'the land, the moon and the stars' if I remember correctly. However Dagoth Ur is not the Godhead, he is delusional and utterly insane. His belief that all aspects of reality are simply figments of his imagination is one of the things that makes him so dangerous. In answer to your other two questions Dovahsebrom seems to cover it adequately.