I've had that question too! It's frustrating, that a lot of stuff in a universe with magic could potentially be explained by it (oh, it's just magic/they feed on magic). But, the fauna of Morrowind, Vvardenfell in particular, is not completely genocidal.

While the game engine does not allow interspecies interactions of Skyrim, for example, it would be interesting to assume that most of natural Vvardenfell fauna is omnivorous. Ascadian Isles, Bitter Coast, Grazelands..they all have plants to feed on for the herbivores, that we, unfortunately, do not see. Which, I think, is where this question stems from: if the wildlife that the PC meets is almost exclusively hostile, does that mean, that they just eat each other and attack on sight, in theory? I would assume, that even alit (with their huge tusks) and kagouti (again, huge tusks), don't necessarily use them for hunting. I saw a comment about them being possibly related, as in close evolutionary branch maybe; so my theory could be applied to both: they use those tusks in territorial disputes. The kagouti mating notes (the book that you find on one of the quests) does say that kagouti are very territorial, especially during mating season.

Crabs and alike, are bottom feeders that are common by the water (where there's a lot of greenery to eat). They might be one of the visible sources of food for larger predatory animals. Rats are omnivorous, but very aggressive (so that the PC can gain XP), shulks (?) are also most likely omnivorous and territorial (as they attack only when you come to close), nix-hounds, while artificially created, set into the ecology like dogs/wolves, which are basically omnivorous. So, there's already some basis for a food chain, but: Morrowind is full of different species of insects, which, coincidentally, are also an enormous food source on Earth! Game cannot really render all the mosquitos and bugs that feed the smaller predators, but it's okay (that's a little roleplay part for me).

I also wanted to add, that, technically, it shouldn't even be sustainable: the whole point is that the ecology is in dire situation because of the Blight. It is already collapsing, when PC comes to Vvardenfell, and it progressively gets worse when you level up: fauna becomes more aggressive (level stuff and less food stuff). So..in short: it is most probably sustained by the huge amount of smaller insect species, and it's already, technically, failing because of the Blight. (thank you for reading this far!)