The staff was forged by Gnilda. According to the manual of the Wizardry Archives, the staff creates a force field "impervious to any physical or magical attack." Persons with good intentions could pass the field, while those with evil intentions could not. However, those who were born in the City of Llylgamyn were unaffected by the staff's powers. The staff was lost when the evil Davalpus was killed in an epic battle in Llylgamyn. He cursed the city, and only the retrieval of the staff could save Llylgamyn. This is the characters' quest in Wizardry II: The Knight of Diamonds.
After the staff was retrieved, prosperity and happiness returned to Llylgamyn. It was probably placed in the Temple of Gnilda.
The Ultimate Wizardry Archives (Manual), p. 60 & p. 63.