Killing the little guy won't hinder you from finding his treasure when you go visit Kerah (and he is worth 6 x 65K exp). The leprechaun stick is not proof - the stone of clover is what the pawn shop is looking for. Just had someone who wasn't getting recognition for this quest - they had equipped the stone - make sure you haven't done the same with either it or the shield. YES, you should try and get paladin to level 5 temple guild for the crusade trait - if you haven't installed the patch, run back to Ishad and take advantage of the Jathil bug to get you there.
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