Morrowind:Overflow Loot Bag

Overview
In Morrowind, each interior cell can hold only a limited number of items. In the console version, each cell can hold up to 256 items, while the item-per-cell limit is increased to 1024 for the PC version. The 256th (or 1024th) item placed in an interior cell will generate a sack labeled 'Overflow Loot Bag' on top of the last dropped item. After an Overflow Loot Bag has been generated, any items dropped in the cell will appear in the loot bag. 

Notes
Each cell can only contain one Overflow Loot Bag.
You may remove items from the bag normally, but you may not manually place items into the loot bag. 
You may still place items in the cell. However, upon re-entering the cell after leaving, you will find that any items you have dropped since the generation of the Overflow Loot Bag have appeared inside of the bag.
The GotY Xbox version fixes the loss of the 256th item; just like any other item after it will be placed into the loot bag, though unlike the other items you may have to wait 24 game hours outside of the cell for it to appear.
The Overflow Loot Bag has an unlimited capacity and does not respawn. This can make it very useful for storing large quantities of items. In some cases, this means that you may want to intentionally create a loot bag.
On the PC,   will grab one item from a stack in a container or inventory. To create the Overflow Loot Bag in a specific place, take a stack of items to the place you would like to create a loot bag, and drop them individually. When enough are dropped, you should have a loot bag, possibly with a few items in it. You may have to leave the cell and return. Due to the tedium involved, the only practical way to do this is in the Windows edition of the game is with a macro.
If the 256th (or 1024th, if you are playing the PC version) item dropped in a cell is small, like an amulet or a dagger, the Overflow Loot Bag can cause that item to be unreachable. On PC, you can use   to get a better angle so that you may pick up the hidden item, or the   command on the bag (e.g., open console, click the bag so it's ID appears in the top of the console window, then type  ).
If you create about a half dozen loot bags (Caldera, nearby  the creature merchant, is a good example), you'll have places to put any items without worrying about how much is there.  If you have the GotY version, or the Tribunal patch, placing loot bags in High Fane, Mournhold, or Sotha Sil (when you receive the Mazed Band at the end), can be helpful to quickly get/drop items from anywhere.
If you wish to redecorate your house, the loot bag could be a problem. However, there is a solution of sorts. For Xbox players, this process takes some time. For PC users, it should be fast and simple, but either way it's well worth beating the Overflow Loot Bag. First, arrange your items the way that you want them in your house. Do not leave the house (or the room, in one that has teleport doors rather than the swinging variety). Next, save your game. After loading the save you just created, all of your items should stay where you left them, even if you leave. Note that placing new items after this will be sent into the loot bag and the process will have to be repeated. 
Another workaround is possible in cells where Rest (not Wait) can be used – a room with a bed, bedroll, or hammock, or anywhere the "It is illegal to rest here" message is not triggered. Remove any items in the bag. When you drop your items, Rest. Then leave the room and come back. The Overflow Loot Bag will be there, but with nothing in it.