Yes, it is the vampire quest I think. By talking to the peeps in Verdistis you can find out that someone has been killing people left right and centre but they are not quite sure who it is. People think its the Wine Merchant (which you can find north-east in Verdistis) because they once saw someone leaving his house and thought it could only be him seeing as he lives alone.
Also the verdistis Town Watch has a drunkard as a commander, so by speaking to him indeed you do find out things about the town but if it involves killing or arresting someone you are either on your own or in some cases you can ask the help of Captain Mitox south of the Army Barracks.
Im not sure about the dwarf you are mentioning. What is that? <img src="/ubbthreads/images/graemlins/up.gif" alt="" />