1. Aginor as well as Mordeth refer to the dagger when talking about SL:

TITLE: Eye of the World, CHAPTER: 50 - Meetings at the Eye

"He guided us." The hand that pointed to Mat was old and shriveled to scarcely human, lacking a fingernail and with knuckles gnarled like knots in a piece of rope. Mat took a step back, eyes widening. "An old thing", an old friend, an old enemy. But he is not the one we seek," the green-cloaked man finished. The other man stood as if he would never speak.

TITLE: Lord of Chaos, CHAPTER: 28 - Letters

Padan Fain sat with his feet up on a hassock, studying the beauty of new-breaking sunlight glittering on the curved blade of the dagger that he turned over and over in his hands. Carrying it at his belt was not enough; from time to time he simply had to handle it. The large ruby set in the pommel shone with a deep malevolence. The dagger was part of him, or he of it. "The dagger was part of Aridhol, what men called Shadar Logoth, but then, he was part of Aridhol too. Or it was part of him". He was quite mad and knew it very well, but being mad, he did not care. Sunlight gleamed on steel, steel more deadly now than any made at Thakan'dar."

The old thing is the dagger. The old friend could be Mordeth, The old enemy could be the people of Aridhol.

2. The ruby is the 'focal' point, which 'catches'/absorbs the light; in the following fragments you can see the knife, more specifically the ruby, actually *doing* something, that is, absorbing the light. So it *behaves* like an Angreal.

CHAPTER: 19 - Beneath the Dagger

How could I forget? He left the chest as it was and pulled the dagger from his belt. The bare blade curved like a horn, and the quillons were golden serpents. Set in the hilt, a ruby as big as his thumbnail winked like an evil eye in the moonlight. Ornate as it was, tainted as he knew it was, it felt no different from any other knife.

TITLE: Great Hunt, CHAPTER: 45 - Blademaster

"Painted screens hid all the walls and any other doors, and veiled the light coming through windows that had to overlook the street. At one end of the big room stood a tall, circular cabinet. At the other was a small table, the lone chair on the carpet turned to face it. Rand heard Ingtar gasp, but he only felt like heaving a sigh of relief. The curling golden Horn of Valere sat on a stand on the table. Below it, *the ruby in the hilt of the ornate dagger caught the light*.

TITLE: Dragon Reborn, CHAPTER: 18 - Healing

The square room within was spacious, its pale stone walls bare. The only furnishing was a long stone table draped with a white cloth, in the middle of the room. Mat lay on that table, fully clothed save for coat and boots, eyes closed and face so gaunt that Egwene wanted to cry. His labored breathing made a hoarse whistle. The Shadar Logoth dagger hung sheathed at his belt, *the ruby capping its hilt seeming to gather light, so it glowed like some fierce red eye despite the illumination of a dozen lamps, magnified by the pale walls and white-tiled floor."

TITLE: Winter's Heart, CHAPTER: 33 - Blue Carp Street

The torment tearing at Rand faded to mere throbbing as Fain vanished from the room, but he followed cautiously even so. At the doorway, though, he saw that Fain was not trying to hide. The man stood waiting for him at the head of stairs leading down, the curved dagger in one hand. *The large ruby capping the hilt glittered, catching the light of the lamps set on tables about the windowless room*. As soon as Rand stepped into the room, fire and ice raged in his side till he could feel his heart shuddering. Staying upright was an effort of iron will. Taking a step forward made that effort seem pale, but he took that step, and the next.

3. The dagger attracts 'evil', and through this attraction the person wielding it is somehow able to recognize Darkfriends:

TITLE: Eye of the World, CHAPTER: 33 - The Dark Waits

Rand was beginning to tense when Mat growled, "Darkfriend."

TITLE: Eye of the World, CHAPTER: 33 - The Dark Waits

"Time to go, Mat," he said, and held his breath. As Mat started to stand, he pulled Paitr's eyes to himself by leaning forward and saying, "Leave us alone, Darkfriend. I won't tell you again. Leave-us-alone."

TITLE: Eye of the World, CHAPTER: 33 - The Dark Waits

"She tried to kill me, Rand. She'd have killed you, too. She's a Darkfriend." Mat spat the word.

4. The dagger can actually *destroy* evil coming from the D.O., but at a heavy price: the evil is formed into a new kind of evil, an evil as dangerous for the Light as for the Dark. You might compare this with burning poisonous substance on a heavy fire; the poisonous substance is destroyed, but gives birth to a substance ALMOST as harmful.

TITLE: Great Hunt, CHAPTER: 3 - Friends and Enemies

"Better than when I'm losing," Mat said with a laugh. Unconsciously he touched his coat at the waist, and Rand winced. Mat had a dagger with a ruby in its hilt under there, a dagger he was never without, a dagger he could not be without. It was a tainted blade, from the dead city of Shadar Logoth, tainted and twisted by an evil almost as bad as the Dark One, the evil that had killed Shadar Logoth two thousand years before, yet still lived among the abandoned ruins. That taint would kill Mat if he kept the dagger; it would kill him even faster if he put it aside. "You'll have another chance to win it back." Wry snorts from the kneeling men indicated they did not think there was much chance of that.

TITLE: Winter's Heart, CHAPTER: 35 - With the Choedan Kal

The gateway he wove did not open into the ruined city of Shadar Logoth itself, but to a thinly wooded, uneven hilltop a few miles to the north, where the horse hooves rang on sparse, stony soil that had stunted the leafless trees, and ragged patches of snow covered the ground. As Rand dismounted, his eye was caught by distant glimpses of the place once called Aridhol showing above the trees, towers that ended abruptly in jagged stone, and white onion-shaped domes that could have sheltered a village had they been whole. He did not look for long. Despite the clear morning sky, those pale domes failed to gleam as they should, as if something cast a shadow over the sprawling ruin. Even at this distance from the city, the second never-healing wound in his side had begun to throb faintly. The slash given by Padan Fain's dagger, the dagger that had come from Shadar Logoth, did not beat together with the pulsing of the larger wound it cut across, but rather against it, alternating."

Through the previous quotes, I think that the dagger is an angreal gone bad. My theory is that this angreal was created by the people of Aridhol in order to be able to defeat the DO and that it attracts evil in order to be able to consume it. However, the effect was that the evil changes in form, but remained evil in nature, hence the evil from Shadar Logoth. Sort of like a miasma affecting or rather, infecting, everything around it.

This evil is what was eating at Mat's memories and what gives Fain (some) of his wacky powers.

Mordeth had to wait for someone to take him to the edge of SL because the power of the Madashar is weakest there and there he could use the body of a person as a vessel. He feels 'complete' with the dagger because it destroys or at least suppresses the DO evil part in him, so that Mordeth can gain control.