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"A deep-red ruby. Made of the Lady of the Lake's enchanted blood, it radiates a strange energy."
The Lady of the Lake's ruby is a quest item which is part of the Ripples quest. It is obtained from the Lady of the Lake in exchange for gifts from both the villagers (led by Julian) and the vodyanoi (led by the friendly priest), but it must be the correct two gifts, there are six to choose from. This ruby is sacrificed at Dagon's altar in order to challenge Dagon to a duel.