Gems are pretty much just useful for trading (low weight, high value). A couple people have placed them around their home base for ambient lighting at night.
I think dogs can turn hostile if you attack a wolf nearby. Also, there is a dog in a hotel room at a certain point in the game, which will attack you regardless if you enter the room, causing other dogs to turn hostile if you defend yourself (don't know if running away will avoid that).
There are plenty of opponents to level up with, as well as completing quests, and most of the game you have a fair amount of freedom with what you want to do. If you need to level up (or check for better equipment), with a few exceptions you should be able to go do something else for awhile, and then return to the point you were having trouble with.
If you resurrect a group of opponents (or one strong one) then run or teleport away, they will turn hostile and you can return to kill them again for more experience and/or loot. This can get boring fast, though, unless you just resurrect and leave them for the next time you happen by (say with groups of lizard men in the Dark Forest, who have a small chance of dropping gold charms). I played with this a bit in Iona's dungeon, with a guardian by the teleporter pad (that always dropped something half decent when killed). Mostly I just used this technique to make sure I went up a level before getting a level bonus (there are a couple in the game), to maximize the experience points received. I maxed Resurrect with purchased spell books.
The Wisdom skill will also give you a bit of extra experience: Wisdom - is it worth the skill points?
Completing quests gives more experience at higher character levels, so within reason you may wish to explore and clear opponents first, before finishing quests. You don't want to forget about main plot quests, though, or end up with so many open quests you don't know where to start.
Opponents give more experience if they are at a higher level, and less if they are lower. This can be used to level faster, but when you do get back to taking out the weaker opponents, you may get little or no experience.
Without leaving Aleroth, you can reach level 4 before you enter the catacombs.
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