Bone key is used in the Shilo Village quest to enter Rashiliyia's Tomb. It can be made by using a chisel on a bone shard. It is used to open the Tomb of Rashiliya. Besides this function, it has no further use besides selling it to Yanni Salika for 100 gp.
The bone key can be added to the steel key ring to save bank space. Attempting to drop it will result in the chatbox stating This looks quite valuable. As you go to throw the item away Zadimus' words come to you again. 'I am the key, but only kin may approach her'.
If lost, it can be obtained again by speaking to Yanni Salika for 100gp.