Delodiil was a prosperous city whose inhabitants worshipped the "Lady of Light", Meridia, at a glorious cathedral. The nearby city of Abagarlas was populated by Ayleid mercenaries who worshipped Molag Bal. King Anumaril of Abagarlas envied Delodiil's great cathedral, and built a far larger temple to Molag Bal. However, King Cenedelin of Delodiil dismissed this temple as "pitiful".
Seeing this, Anumaril became enraged, vowing to invade Delodiil and sacrifice all its people to his dark master. Using knowledge granted by Molag Bal, he raised an undead army to assault Delodiil, and he began to construct a magical weapon called the Mortuum Vivicus, which would sap all life from Meridia's city, converting its inhabitants to undead slaves.
However, Meridia provided her own assistance to Delodiil, and warned its people of the Mortuum Vivicus. Using the Daedric Prince's knowledge, and by sacrificing the lives of their own priestesses, the Delodiils were able to create a powerful artifact called the Prismatic Core. Having forged a weapon from this artifact, a small group of Delodiils infiltrated the temple at Abagarlas, intending to destroy the Mortuum Vivicus, while Cenedelin assaulted the city with his full might.
The plan was a success. Delodiil forces, backed by magical assistance from Meridia herself, were able to destroy Abagarlas utterly, along with the entire royal family (excepting King Anumaril himself). However, Molag Bal pulled the Mortuum Vivicus into Coldharbour just before it could be destroyed. Meanwhile, King Anumaril was himself marching upon Delodiil. However, when he approached he found that the city had vanished, down to the very last brick. With Abagarlas destroyed and Delodiil missing, the war was finished.
It's not clear what happened to the city of Delodiil. The legend of the city's disappearance bears a striking resemblance to the history of the Hollow City, also built around a cathedral dedicated to Meridia, which was transported by her into Coldharbour in response to an attack by Molag Bal. However, the Hollow City was transported in the time of Laloriaran Dynar, the "Last King of the Ayleids", and therefore at the very end of the decline of Ayleid civilization, while Delodiil apparently disappeared when Ayleids still ruled the Heartlands.
The agents who attempted to destroy the Mortuum Vivicus later wrote journals suggesting that they knew Delodiil's location, but they refused to return there, apparently hoping to keep its location secret even from Molag Bal's forces.