Caeus caught me opening one of the chests in his house (he had told me he was leaving and I could use the house, so I took the word "use" literally). He started punching me so just for the heck of it I killed him. I got the expected message of dread that I had killed this essential character, and was encouraged to restore a savegame, but was also allowed to "persist in the doomed world you have created".

Anyone ever try persisting with the storyline? Just how doomed is it? I could still talk to everyone -- I suspect I could probably continue on the main storyline, far as I could tell before I exited the game. Never did save, though, since I didn't want to risk having my nice level 60-something High Elf in a damaged plot.

Caeus is needed for you to advance through the main plot. If you killed him, you will not be able to finish the main quest, which is to end the blight storm and to save the world of Morrowind from certain evil individual.

Of course you can still continue to play the game as it is, but you will not be able to finish the main plot. BTW, since some of the interesting quests are triggered by Caeus, you will miss those quests as well.

If you killed him after he stated he was being recalled to the mainland, you have no problems. You are done with him at this point in the game.