This is essentially what I'm trying to do:

For example, at level 5, a Steel Sword of Leveling which is equipped by the player does 10 dmg .

When PC is at level 50, the same Steel Sword of Leveling should have 50 dmg or something (the item should level up as the player levels)


From what I understand I can't make this a leveled item since I can't place it directly in the player's inventory, only in a container. Or can I?

Any help would be appreciated.

You can- with scripting.

Assuming that the "of levelling" is an enchantment, you can use a script effect to fire it off.

What the script will need to do is to be always active, and check the player's level. When it detects a level change, the weapon is removed from the player's inventory, and the next grade up will be added in at the same time.

It will require you to make several grades of the enchanted weapon, so you may wish to make it only level up every, say, five levels or so. Unless you do want to make about 80 or so seperate weapons and put them into the script...