The fight in the Hall of Echoes was just a memory. The end of the game, though, you do kill Ygerna yourself. Presumably then Zandalor and the mage that was helping with the rifts in the ministry were able to rescue Lucian, or the fact they Ygerna was killed weakened the prison enough he could escape himself.
The game didn't really go into a lot of detail about the supposed murder. I think Damian managed to corrupt a dragon knight and get him to attack Lucian during a battle, and in the confusion used magic to capture him. People saw the effect of the magic, and the Divine One no longer there (and presumably not found by mages), so he was thought dead.
