Yes, you can enchant and use the sword now, and delay turning the quest in until you get something as good or better to replace it. I used Barnabus' mace for some time (with enchantments added) before turning that quest in, etc.
The best weapon I found in the game was from Ba'al at the end of the mine in Broken Valley (I also went back pretty late in the game). Save before finishing him off, and you can reload a couple times (if you wish) to try to get something suited to your character build and play style.
