Dread

Dread is an empty scabbard. At least, that's what an outside observer could tell you. To the one wearing it, they know that there is some terrifying thing inside it. They can draw it out and wield it as a knife.

Dread may be "drawn" and "sheathed" as if it were a dagger; attacks made with it are melee touch attacks. However, attacks made with Dread don't cause any physical harm; each successful attack instead causes the victim to become Shaken and Fatigued until they next sleep in a safe place, with DC 25 Will save negating one of the conditions, their choice. These conditions stack; a creature struck unconscious by Dread is not helpless, however, as they thrash and scream in the midst of a nightmare.

As each attack finds its way home, the victim starts to see a black forest appear at the edges of their vision; in it is that horrible thing in the scabbard. It is the worst thing in the world. Each blow brings it closer, and closer, until they feel its nightmare breath kissing the back of their neck.

They try to run, but they can't...

The conditions inflicted by Dread cannot be removed by any means except for a full night of sleep in a place that the creature knows is absolutely safe, or a Wish-equivalent spell. Until the conditions are removed, each night they are targeted by a Nightmare effect (DC 25 negates); if they fail a save, they no longer consider wherever they were sleeping as safe, because that thing found them.

Finally, as long as Dread has been "drawn", any divination effect cast that targets the wielder or which asks a question about the wielder fails to return an answer, instead affecting the inquisitive caster as if they had been struck successfully by Dread.

If anyone cares to look inside Dread, they'll find only a pervasive feeling of fear and a small inscription, reading "what are you really afraid of?"