The dragon inn tankard is one of the items which players take out of the ruined backpack during the Zogre Flesh Eaters quest. It has the "look at" option. Doing so reveals that it has the dragon emblem and the words "Ye Olde Dragon Inn" on it, a clue to seek further evidence at the Dragon Inn.
Showing it to the bartender in Yanille prompts him to tell the player that it belonged to Brentle Vahn, a fighter with a reputation for selling his skills unwisely. The bartender then remarks that he's seen Brentle in the company of a shady wizard; since the player found the tankard among skeletal human remains, it becomes clear that Brentle met his end while on some errand for this wizard.
It is used again at a later stage of the same quest to persuade Zavistic Rarve that Brentle was the body in the Zogre cave. In combination with other evidence, this leads Zavistic to help the player catch the culprit.
This is the only item during Zogre Flesh Eaters which disappears from both the players bank and inventory when the quest is finished, including all duplicates.