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That's the "Lil Green Dude" or leprechaun. You have to find his treasure as a quest from the pawnbroker shop, but that won't happen till later. You can terminate the verdant pest (worth 64,000 XP from memory) with no penalty (other than any concience you have that might think he's cute). He is not easy to eradicate, I used area ranged spells like Fire and Meteor storm, and it too about 10-15 of these because he walks on out of them. Try and stay away from him so he doesn't teleport, otherwise you go to track him down all over again.
Cheers,
Davros
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