Morrowind is a free-form game. That means you can do pretty much whatever you want to do, up to and including killing everything that moves. There is not one NPC in the game who cannot be killed. There is one NPC that requires certain conditions to be met before he can be killed, there are several NPCs that are extremely difficult to kill and there are a few creatures that will simply reappear when you leave the area, but you have the freedom to kill everything in the game.
Forty NPCs are classified as "essential". This means that they must be alive and kicking so that you can do certain parts of the Main Quest. Additionally, there are some NPCs that are important to the essential NPCs. If you kill the important ones, the essential ones will not do what you need them to. NPCs do not walk around with signs on them that say "I'm essential" or "I'm important". So you won't know whether they are or not until you find the door closed in your face. For the essential NPCs, you will usually get an on-screen message that says something like "this path to your destiny is closed". That's a good clue that you just screwed yourself.
Each NPC that you murder (if they attack you first, it's self-defense) results in your crime level being increased and a 1040 gold bounty will be placed on your head if there were witnesses (1000 for killing the NPC, 40 for the initial assault). When your crime level exceeds 5,000, the guards will tell you that there is a death warrant on you and will immediately go to combat mode. When your crime level exceeds 10,000, they will just attack you on sight. Since there is no way to reason with these guys, you'll either have to run or kill them (which increases your crime level even farther).
You only have two options in this case. Restore a saved game or find some way to get the bounty removed and your crime level reset. If you are a member of the Thieves Guild, there are three or four NPCs who can take care of the bounty for you. Just ask any Thieves Guild member about "price on your head" to get directions.
There are lots and lots of goodies floating around. Some are free for the taking; some belong to NPCs. Almost anything you can pick up can be sold, though it might be tough or impossible to find a merchant with enough gold to buy some items. You can break into people's houses and steal them blind. You can pickpocket any NPC who is not in combat mode and steal whatever they have that is not equipped (and there is even a way to get them to unequip things so that you can steal them).
The NPCs in Morrowind do not take kindly to thieves. If you are caught in the act, they will raise the alarm, summon the guards and then attack you. You'll probably have to kill them and that might not sit very well with other NPCs and will take you back to the problem of killing NPCs.
Here's a quick breakdown of the crimes that you can commit in Morrowind and the associated bounty that goes with it:
|Assault (unprovoked attack)||40 gold|
|Murder (self-defense doesn't count)||1000 gold|
|Theft||value of the item stolen|
(picking locks, sleeping in someone else's bed, etc.)
(the fine doesn't seem to work)
Another little problem is that any of these, if done to a member of one of your factions, will get you expelled from the faction. You can typically "make amends" by talking to one of the faction's quest-givers. Some offenses require that you talk to the head of the faction. Once that is accomplished, your faction membership is restored and things are hunky-dory. But what happens when you are the head of your faction? There is no option that will allow you to reinstate yourself, so you cannot make amends. No faction members will provide services and you're out in the cold.
The moral of the story is: restrain yourself. Be nice to others and others will generally be nice to you.