Just to add to the chorus, I got a comparable framerate with a P3 1.4GHz Tualatin and a Geforce2 MX (lower res though).. something is definitely wrong.
As a more relevant comparison for your system, I ran the game for 1-2 years with an Athlon XP 3000+ and Radeon 9800 Pro at 1280x1024, and it was very smooth (no MGE). I don't think I ever measured the frame rate but it was pleasant.
My main suggestion would be to dramatically downgrade the video driver to something closer to Morrowind's time period. Even if you have to upgrade it again, at least you'll have an idea of where the problem lies.
I'm not sure it's that important to have the latest drivers anyway. I've never kept up with video drivers myself and it hardly seems to matter. I'm sure it's different for everybody though, depending on the particular card and what games the person is playing.
For whatever it's worth, my desktop uses a GTX260 with driver version 260.99, and DX9.0c on XP 32bit. It runs modded MGE Morrowind fine (it's a newer CPU though). I don't know if that's a particularly good driver, it's just what I happen to have. If I were having the strange framerate problem you're seeing, I'd probably try something much older from when nVidia was still paying attention to DX8.
Something else I just remembered - believe it or not, there is more than one version of DirectX 9.0c. Microsoft forgot what version numbers are for. When I was setting up MGE I had to update my 9.0c to a "newer" 9.0c to make it work correctly. But the problem I had wasn't slowness, it just refused to run.
I wonder if something in the Morrowind configuration could have somehow been messed up which is making it slow. There's settings in Morrowind.ini for example which maybe could do that.
If you can't find anything, I suppose reinstalling the game wouldn't hurt, and try running it completely unmodified before adding mods/MGE back.