Morihei Ueshiba is referred to in Japanese as "O-sensei" in a couple of different ways (from more common to less): 「大先生」and 「翁先生」.「大」, in this case, means "big," "grand," or "great." I don't know of a context in which that character would mean "elder." 「翁」 (also read as "okina") means "old," "revered," or "venerable."
He is also sometimes (not commonly) referred to as「老先生」 (which I would pronounce as "rou sensei"). 「老」 basically means "old."
He is also very commonly referred to as 「開祖」 which basically means "founder."
Gozo Shioda often used "old" 「老」 - most of the time that Kisshomaru wrote it he used 「大」, which is the same character used by Sokaku Takeda (but pronounced "Dai-Sensei").
"O-Sensei" is actually not all that uncommon in Japan, sometimes even just referring to the main instructor in a group of instructors - but it can be kind of jarring for US Aikido students to hear.
My personal theory is that the whole thing started when a reporter interviewing Ueshiba was called "Sensei" by Ueshiba and then replied "Well, if you call me sensei than I will have to call you O-Sensei". But that's just my hunch.