My interpretation is that Azura compelled Dagoth Ur to madness after Almsivi betrayed Lord Neravar. She could see their intent, and that they would slay Dagoth Ur if he defended the heart in his mortal form.
Therefore, she set forth her prophecy in motion and compelled Dagoth Ur to madness, leading him to draw power from the heart so that he would be physically capable of preventing the false gods from completely
exploiting the heart until Nerevar was reincarnated.
So in my eyes, no, he was not evil. Dagoth Ur is and was Lord Nervar's most trusted companion to the end. In his own way, he guarded the heart preventing Almsivi from conquering the world,
until finally being put out of his madness at the hand of Neravarine.
This is, I believe, the only explanation that makes sense of the written accounts in game, which glorified the trustworthiness and righteousness of Dagoth Ur during his mortal life.
Written accounts implied Dagoth Ur was more steadfast in his mission to destroy the tools than Lord Neravar himself.
If Neravarine was capable of handling the tools and being near the heart without being compelled to exploit it (as is the canon of morrowind),
then we should be able to conclude that Dagoth Ur was not tempted by the tools nor the heart.
Given the nature of Azura, a deadra who plays with mortals and uses them like pawns to fulfill her own prophecies, it seems likely that "Dagoth Ur's temptation"
that she mentions in the end cut scene is a temptation she compelled him toward.
You have to understand that it was absolutely necessary for Dagoth Ur to become evil for Azura to both fulfill her prophecy and prevent the false gods from
completely ruling the world. Azura could have simply used Dagoth Ur to break Kagranac's enchantments on the heart, there and then. But Azura, firstly,
want to play the long game in order to punish the tribunal and the chimer over a long period of time. She wanted the tribunal to taste godhood, to slowly
lose the power, grow mad, and become nothing. That is the vengeance of a deadra. Secondly, her vengeance had to be delivered by Lord Neravar because of the
symbolic significance of the betrayed servant of Azura being reincarnated to smite the false gods. Therefore, the heart had to be spared until the incarnation of Neravarine.
Yet, Dagoth Ur could not simply die nor join Almsivi. Both would leave the false gods unhindered in their quest of world domination.
Therefore, out of necessity to fulfill her prophecy, Azura compelled Dagoth Ur into madness, so that Azura would have enough time to see her vision through.