I am currently in Lake of Ill Omen, and I this find this quest very intriguing. A couple thoughts:
First of all, perhaps the quest is primarily for non-Iskar and classes such as Wiz , Mage or Enchanter. Enchanters are the natural jewellers of the game, and maybe the hilt has to be combined in a Jeweller's kit with gems one at a time (unless hilt is classed as "container" when you right click on it). i am not sure what the gems could be, but found some sort of Lore item Gem off of an Ice Skeleton called Heart of Ice. Maybe there are more lore item type gems like this one found of the various creatures in Kunark.
Secondly, maybe it has something to do with the new Shaman Imbue spell. Shaman can now imbue different stones and items like ivory with magical energy much like the enchanter's can enchant metal.
I'll try to go see the sorcerer and hopefully my faction will be high enough to get the quest. I'll try the heart of Ice, and if the hilt isn't a container then I will try combining it in my Jeweller's Kit.