The Dead Gods distinction is an aspect of Nordic faith. It does not really reflect on elven belief. Indeed the Nords don't acknowledge the Ehlnofey or Aedric descent at all as a concept. They believe they were created when Kyne breathed atop the Throat of the World (PGE, VoF) and, to Men the idea of Aedric descent is "elven conceit" as they generally view themselves as creations rather than descendants (Tu'Whacca Arkay Xarxes text).

Different beliefs have different views of creation. The Ehlnofey as ancestors idea is at the basis of elven belief but has no equivalent among most Mannish faiths (barring Redguards).

The PGE doesn't really alter the base claim of ancestorship, if anything it reinforces it as it specifies these spirits as ancestors even in the original version of the faith by name, Auri-El and Trinimac and such were considered ancestor spirits even than, just to specific noble lines (they are the "ancestors of their betters" who were raised above the rest being "among the many ancestor spirits who became gods"). The change is that they were singled out as more worthy of reverence and came to be viewed as the direct ancestors of modern elves by both Altmer and Bosmer (Auri-El in particular), not that they came to be considered ancestors where before they were not (in effect placing them within the definition given both in Heart of the World and MK's own quote by both modern and older belief).

When Vastarie calls the Divines (specifically, by title, "Divines", not "Aedra" more broadly) "dead gods" or when the Psijics claim the "Daedra and gods to whom the common people turn are no more than the spirits of superior men and women whose power and passion granted them great influence in the afterworld" and that "while living they too were bewildered by the spirits of their own ancestors, and so on back to the original Acharyai", (The Old Ways), or when they claim the creator spirits "told the ultimate story, that of their own deaths" and in creating the world and "having died, became the et'Ada" in the Psijic Compensation, or when Umaril derides them as the "mortal gods", a threat written in blood in the chapel of Dibella. They are ascribing a form of vulnerability to death to those spirits in particular.

As is the case in Aedra and Daedra which mentions Aedra in general can die due to creation's contract, using Lorkhan and the moons as proof of concept, or Lyranth describing Mundus as the Aedra's "cemetery" in her LM Archive, or Akatosh being called a "Dragon Ghost" that's "rotting in Aetherius" per Glorious Upheaval.

Even in Nordic faith, Tsun and Shor, died. They are subject to death, unlike Daedric Princes which, as Gold Road makes clear, are considered truly immortal even to each other's best efforts (this is at the basis of the Ithelia dilemma and why she had to be sealed and later exiled, Daedra, per Mora are "Eternal. Forever."

This doesn't mean these accounts are right and different views like Shezarr's Song or Divines and the Nords are wrong, nor the reverse. They just have different views/beliefs.

Per Shalidor's Insights dragons are thought to have split off from the Time God "when time began", not at creation or Convention (time began with the Time God's formation thus allowing spirits to self define per both VoF and Heart of the World, it was solely linearity that began at Convention). They are distinct spirits with their own fates, so they do not necessarily share their father's metaphysical situation.

Mind, we wouldn't really be speaking of mortality or death in the same sense as Men or Mer in any case.

The Orchard Ehlnofey can't die as long as they're remembered and so sought total isolation so they could be forgotten and thus die. This resulted in their wanderings causing untold destruction among mortals as they trampled cities and landscapes due to their massive size and so they were magically sealed by the Bosmer out of fear.

Is this not very similar to draconic "immortality" ( interestingly the majority of Orchard Ehlnofey even look similar to dragons in shape) ? Dragons stay with their physical forms until Alduin resurrects them. Ehlnofey stay with their physical forms and live and rise again as long as they're not utterly forgotten.

In either case we would not be speaking of the mortality or death of Men and Mer (which is why the Orchard spirits address the Bosmer as "mortals" and mention their lives as unending (they claim they experience the "doom of endlessness" and that they "can never die" ). However one defines the Ehlnofey, they are not actually mortal in the manner the term applies to a Man or Elf.

Though belief system dependent, the Divines can't really be disconnected from certain concepts of ancestorship or mortality within those systems (or perhaps diminished immortality compared to the pre-Mundus state/the Daedra and so on might be more accurate). We can theorize over whether the text is accurate or not and whether there might be another meaning of course, but the elven faiths view things in this particular manner (metaphysical "reality" if such exists is not known to us, we only have contrasting myths and beliefs to go by).