Philippa reluctantly gives this dagger to Geralt to break the spell she placed on Saskia. To get it, the witcher must take her back to her house in Loc Muinne, where it is locked away in an enchanted chest protected by a glyph and five candles.
The sorceress explains that the dagger must be thrust into the dragon's heart to lift the spell, nothing less will work.
If Geralt takes Roche's path, this dagger can also be found during the epilogue, on the body of one of the Kaedweni/Nilfgaardian Knights that Geralt encounters on his way to Letho. At this point in the game, it has no purpose as a quest item, since you can't return to the dragon to make use of it.
If Geralt has taken Iorveth's path, but chose not to help Philippa, he finds Iorveth unconscious and injured by "high magic" according to Triss. The knights attempt to take Iorveth into custody, while mentioning that they took an item off of him. If Geralt continues to try and talk with the knights, they attack and after killing all of them, Geralt can find the dagger on one of their bodies. By this point the dagger won't help because Geralt already battled Saskia and can't return to her, even if she was spared. The implication seems to be that Iorveth tried to kill Phillipa and was injured in the process.