It drains mana. <img src="/ubbthreads/images/graemlins/biggrin.gif" alt="" />
With each successful hit, it will drain (or has a chance to drain) some mana from an enemy. It can be resisted with a high spiritual resistance, so it will not be as effective towards the end of the game. I got a sword with mana drain from the knight south of the castle; it dropped the number of potions I needed, since it refilled my mana enough to get an extra couple casts of Restoration.