In order to gain a level in Morrowind, you must improve your Major and Minor skills by a combined 10 levels. You can gain 1 level in each skill, or 10 levels in one skill, or any combination thereof.
Afterwards, you need to sleep (not just rest/wait, but sleep, either in a bed or in the wilderness), and you will be able to gain a level.
When gaining a level, bonuses will appear, up to +5, for your different attributes, depending on the skills you leveled up since your last level. This includes skills that are neither major nor minor skills. Therefore, increasing these other skills can be a good way to ensure you get a +5 in the stats most important to you. The bonus is defined by the attribute associated with the skill, so therefore, Luck will never get a modifier.
You pick 3 attributes to increase at levelup, so if you have bonuses on 4 or more attributes, extra bonuses will be lost.
It's also important to note that, if you gain more than 10 major/minor skills before you get a chance to sleep, the extras will carry over towards counting for your next level. You will only gain one level for each time you sleep, so if you've gained 20 or more skills, you'll need to sleep at least twice to gain all your levels.
Any attribute bonuses you've accrued go away as soon as you've gained a level, so it's generally preferable to level as soon as you get the 10th skill, or else you're liable to waste attribute bonuses you could have used otherwise.
From the Unofficial Elder Scrolls Pages:
Luck is an Attribute that affects everything you do in a small way, from attacking, to the chance of successfully enchanting an item.
Luck is special in that it is not the governing attribute for any particular skill. Thus, Luck never receives a bonus multiplier when you level up, and can only increase +1 per level. Most effects from good Luck can be achieved by trial and error with use of quick saves, but a high Luck is quite handy in many situations, including lock picking and alchemy. If you choose to never increase your Luck in level-ups, you might want to create a Fortify Luck spell, enchantment, or potion for those occasions when you need to be extra lucky.
Luck is very important for mages, because it increases the chance to successfully cast spells. In Morrowind spells can be created that have a chance of 0% of being successfully cast even if one has mastered the necessary skill. But with enough Luck one can increase the casting chance to any number.
Luck, however, has no effect on the quality or quantity of random loot that you find. This is an old myth that has been proven to be false.
If you have Tribunal installed, you can see the effect of Luck in combat while fighting a certain Bosmer. Gaenor's unusual high luck of 770 in addition to his level and high armor rating makes him very hard to hit.
Best Answer
I am guessing it was only for devs to quickly debug repair items and such without having to use them. Don't know if any mods use it.