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.
All magic is suddenly gone. No mage can sling sorcery anymore. This upsets all empires and civilizations. It is soon discovered though, trough the combined work of mystics, scholars and dreams, that all the magic has been drawn into a single orb in a vast tower located at one of the poles. Whoever gets there first wins the greatest price in history, access to all the magic in the world. But who owns the tower?