The Shadowsword is a cursed item, though it can be used as a Magic Item to cast the Steal life spell. Its effects on the holder are -30 Lifepoints, +6 Spell Points, -50 Stamina and -30 Lockpicking.
Dealing 25 damage, the Shadowsword is the second best sword in the game. (Second only to the Gaze of Kamulos, which deals 26) So, if you're ok with the loss of life-points and having it permanently attached to your player, it's ok to equip. (It can only be removed by a healer)
Compared to the Gaze of Kamulos, Shadowsword comes into play very early in the game, making for a huge early-advantage in damage dealing.
The Shadowsword is a very versatile weapon, and can be equipped by anyone in your party. The -30 Life points is fairly severe, but it can be offset if used by one of your Tank Warriors. Drirr makes for a good candidate, as he has extra life points to spare, typically doesn't do much for Lock-Picking, and has decent speed (With the reduced life points, it's important the a character wielding the Shadowsword would attack first)