The Soultaker Dagger was used by Durlag Trollkiller to capture the soul of powerful demon by the name of Aec'Letec many years ago. This dagger is like a normal dagger, when the properties of the weapon are compared, it only has a higher item value and a better look in BG:EE. Hurgan Stoneblade in Ulgoth's Beard Inn requests you to retrieve this dagger from Durlag's Tower in his side quest. This dagger is retrieved when the party reaches the lowest level of the dungeon and kills the Demon Knight. When the dagger is brought to Ulgoth's Beard, the group will have an encounter with members of some cult. Regardless of the outcome, the members of this cult will gain the dagger and revive the demon Aec'Letec, which you'll have to kill.
At the end of Dragonspear event a hooded man murdered a former companion of yours using this dagger, trapping the victim's soul within it. If the dagger is in your inventory before the scene, it will be removed from your bags. It also appears in a cinematic later in the game.
This dagger weighs heavily in your hands, and is warm to the touch. Merely having it on your person makes you uneasy for some reason. The gem mounted in the hill seems to have some inner light of some sort, though how it can have such illuminations and still be so deathly black at its core, you do not know.