spoiler....
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http://www.tgeweb.com/ironworks/icewind/worldmap.shtml
Go there, click on Dorn's Deep, then look at Area 10.
See the Terkan's Phylactory? That's where it is located, the same room as his diary. Then take that to the area marked in red. Once that is done, the forge should work and you should be able to get the key (and the ghost will thank you).