While the timeframe for this event isn't quite clear, we know that sometime between being released from absolute Dragon rule and between the first kingdoms appearing, the Alghollthu returned. Without any written first-hand texts we are only left with what was later written, though many accounts recall similar oral history so we can make a rough approximation of the event.
Mortality was seemingly more advanced than one may think after the end of Dragon rule. So much so that there are accounts of ships being sailed throughout the world, possibly linking the continents together much sooner than standard history gives credit for. However, during this mini-golden age of mortality, the ancient enemy of Dragonkind returned, the Alghollthu.
Possibly due to noticing Mortalkind's ships sailing above their domain, the Alghollthu attacked. It appears as though Mortalkind, now independent of Dragonkind, attempted to fight off the Alghollthu on their own, but eventually failed and had to retreat to exclusively dry land. Without the Alghollthu's intervention, the races of Mortality may have met much sooner and history itself changed. It is also during this time that the many stories and myths of the ocean come from.
Although Mortality retreated to dry-land, it was not enough. The Alghollthu posses both mind-altering and shapeshifting abilities, and with these powers were able to infiltrate our domains and take control. Fortunately, it appears Dragonkind felt sympathy, and found a way to help against the Alghollthu without directly interfering, because it is around this time that the first records of mortal divination appear.
The Dragon's seem to have created divine magic by allowing Mortalkind to harness a mere fraction of their powers for the purpose of driving the Alghollthu back to the seas. Were it not for their generosity and mercy upon the recently-rebelled mortals we would not have any divine magic today. It is also around this time that the first order of paladins makes mention, and when ancient temples began appearing.
Eventually, using divination magic and holy rituals, Mortality was able to drive the Alghollthu shapeshifters and those under their control back into the water. Interestingly, the Dragon's seemed to have been impressed with the effectiveness of Mortals weilding divine magic because not only did they not revoke these powers, but they actually seem to have granted another blessing, for it is at this time the first mentions of the elemental races appear. Indeed, it appears that the Naari, Oread, Sylph, and Undine blessings were granted originally at this time.
As for the Alghollthu, ancient Mortalkind was able to seal them and their influence to the deepest parts of the ocean. To this day, there are still areas of the sea that are highly discouraged to sail through due to their undying malice.