Seeing as this item will affect generally those who in some opinion may already be damned, I don't see it as too overpowering.
It seems simply to be another means for Demons to gain access to victims to possess, and is a reasonably appropriate one.
Now, as for it being eternal, etc. It sounds like it could be undone by an exorcism so long as the gem is also available to retrieve the original soul, assuming the deity of the priest performing the exorcism is willing to the help the adulterer. (Given that the spirit which has gained liberty may be a far worse one makes this likely). I think this is a more likely scenerio then bartering with the Demon.
This is also an excellent way to bring back evil NPC's that the PC's have sent to their just desserts, though possibly in a body of a different gender :)
I agree with Manfred on this one. If it can glow as bright as a torch, it either is operating as a very powerful chemical (non-magic) which would rapidly eat the wood (where else does it get the energy?), or it is magical (and would detect as magic). If magic, where did it come from and why?
The fact that it works on weapons tells me it is magical, or it would have to also convert metal into food for the fungus(and thus power the luminescence :))
So, in summary - if it is natural, then it would need to be toned down and extract energy from both wood and metal. If magic, then some info on it's origins and purpose.
In a city where the justice system features judicial dueling, plaintiffs and defendants are permitted to request a champion to take their place in the duel: Someone chosen by lot from among the foreigners in the city. When anyone first arrives, they are given an enchanted ceramic pendant that marks them as a candidate for "court duty".
Wealthy folk entering the city are often escorted by burly guards, paid to carry pendants on their behalf: They elude court duty in that way.
Adventurers may seek work as a rich man's proxy or may find themselves magically summoned to serve as a champion.