Bethesda has simplified the process of gaining levels. Simply increase your Major and Minor skills by a total of 10 and you gain a level. So you can increase one skill by 10 or two skills by 5 or three skills by 3 and one by 1 or whatever combination suits your fancy and circumstances. As long as you gain a total of 10 skill increases in your Major and Minor skills, you increase one level. Increasing your Miscellaneous skills will not help you gain levels, though it can have benefits at the time of the level increase.
A few things happen when you gain a level. First, you get a nifty little message telling you how well you're doing and how you're finally figuring out how things work (they are different messages up to about level 20 -- after that, it's the same message each time). Second, you gain a number of Health Points equal to 10% of your Endurance. Third, you get to increase three of your attributes.
Increasing your attributes is the major benefit of gaining levels. Unlike other RPGs where your character can do things better at higher levels, you get better at doing things as you go along. That's what your skill increases are all about. In Morrowind, a 1st level character with a 35% skill in Short Blade is going to do better with a dagger than a 75th level character with a 20% skill in Short Blade. Sure, the 75th level character can take more damage than the 1st level character, but the 1st level character is going to use that dagger better.
There isn't anything you can do about how many Health points you get. That number is pretty much set in stone -- 10% of your Endurance. You CAN however, exercise some control over your attribute bonuses. You will see those bonuses as a multiplier (x2, x3, x4, or x5) next to the attribute when you gain a level.
How you increased the skill can have a dramatic impact on the multipliers you gain when your level increases depending on whether you are running the patched or release version of the game.
You can gain multipliers for skill-governing attributes when you increase the skill through using it. This applies to both the patched and released versions of the game.
You can gain multipliers for skill-governing attributes when you increase the skill through training. In the release version of the game, this applies only to attributes governing your Major and Minor skills. In the patched version of the game, this applies to all skill-governing attributes.
You can gain multipliers for skill-governing attributes when you increase the skill through reading books. This works the same as training the skill in the patched version, so I assume it works the same as training the skill in the release version. In other words, only Major and Minor skills will give you a multiplier.
The multipliers are fairly simple. The game keeps track of which skills have increased since your last level increase and increments a counter with the associated governing attribute(s). When it's time for you to gain a level, it checks those little counters and gives you a multiplier based on the following (thanks to Fallen Murk for the numbers -- he says he got the information from others, but I got it from him, so he gets the credit for it):
So, if your Strength-governed skills increased by 12, your Intelligence-governed skills increased by 5, your Personality-governed skills increased by 20, and there were no other significant skill increases, you would have an x5 multiplier next to Strength and Personality, an x3 multiplier next to Intelligence and nothing next to the other attributes.
A word of caution at this point. When you get the message saying that you should rest and meditate, go rest and meditate. Don't delay any longer than necessary. Remember when I said "since the last level increase"? I meant it. If you increase Major and Minor skills by 25, but don't stop to rest when you get the message, you will still get two level increases. But you will have some serious multipliers for the first level increase and nothing for the second one.