Sounds almost exactly like what I've just ran into, except that azo wasn't hostile. I killed everything hostile (flesh golems, prisoners in the north ward, wichts) then went to Azo, told him "We'll see" about ratting him out, told the warden about his experiments and then nothing, subdue Uscgrim is just greyed out. Anyone know maybe a console command I can use to force the quest to be complete or something?
Also as an aside, I went back down to see if killing Azo would do anything, saved beforehand, after I killed him the NPCs in the area seemed to respawn, patients in the main area are back, as is the assistant and the guards, even the wichts are standing, non hostile, in their cell. Only the flesh golems haven't respawned and all the doors are open. This even unlocked the dialogue option with the main warden where I told him I killed Azo, but this did nothing to resolve the quest
My last manual save was 21 ingame hours ago...