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Steam overlay - try disabling it.
Any other input or bluetooth devices connected - might be a conflict.
Other programs, especially game overlays i.e fraps, Raptr.
Keyboard language setting - Use run - "intl.cpl" - ensure keyboard is set to same language as Steam and Morrowind.
That is all I could find and /or think of.
Couple things to try out:
1.Disable Steam Overlay.
OR/ AND
2.Go to your Morrowind folder, and look for Morrowind.ini. There is a line called "Background Keyboard". Change it from 0 to 1.
Let me know if this fixes (or doesn't fix) the problem.