It appears to work similarly, though at a lower percentage.
Oblivion's Chameleon at 100% (emphasis mine):
It is possible to combine multiple Chameleon enchantments to reach 100% Chameleon, causing your character to be visually non-existent and nearly completely undetectable while performing any actions. NPCs will only interact with you if they are scripted to by a current quest or if a guard is attempting to arrest you. Values higher than 100% are possible, but do not provide any additional benefit. With 100% Chameleon, you are able to move freely throughout the game, killing, stealing, sneaking, and doing almost whatever you want without ever being seen or confronted. You are basically invisible to all living creatures or people within the game. However, you can still be damaged by items or traps.
So essentially in Oblivion, 100% Chameleon, as you stated in the question, makes you basically invisible, allowing you to get away with whatever you want.
A similar effect appears in Morrowind (emphasis mine):
If the Magnitude of the Chameleon effect is high enough, no object will be able to spot you under various conditions, seemingly based on Fight rating. 75% Chameleon seems to be sufficient to walk right past hostile NPCs without issue.
So it seems that the same ability to move around undetected exists in Morrowind, though unlike in Oblivion, it occurs at 75% Chameleon (as opposed to 100%).