Here's the deal:
SPOILER
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If you give her the sword back, you get about 2000XP and that's it. If you SAVE THE VILLAGE she is concerned about (to the east of her), and THEN give the sword back, you get the sword as well. The dialog I chose with my Paladin was the "No reward is necessary" one , rather than "The tenants of my faith won't allow me to accept a reward" reply to get the sword and XP.
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and the flaming sword turning every way, guards the tree of life.
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