If you use the spell 'poison cloud' you can kill anybody and anything you please, with no loss of reputation. The trick is to cast it near the 'friendly', because you can't actually target them directly because they're not hostile. I use this to clear out the citizens and guards in the Merchants area and in Verdistis. In fact, I use it to kill anybody who keeps getting in my way and bugging me. It's also a handy way to prevent yourself getting into trouble when stealing stuff. Just kill off everybody in the area where you want to loot, so that you won't be caught!
A word of warning though! Don't kill anybody who is central to the story, like Mardaneus and Goemoe for instance. And it might not be a real good idea to murder the merchants either, you've got to have somebody to trade with after all.
Hope you have fun.
