The Holy Dagger is in a book in the cellar of the Thieves Guild in Verdistis/Ducal Inn. In order to access this area, you have to be a member of this guild - by asking Rob, the guild master upstairs. He will ask you to pickpocket Sweeney, a drunken guest in the Ducal Inn (pickpocket lvl 1) and fetch him a bottle of beer from the cellar (lockpick lvl 1).