You do have to kill Narfi if you want to progress the questline, but you don't end up having to kill too many more people like him. In my game I always thought that the inn keeper hires in the DB to mercy kill Narfi since he's not having the best life. If Narfi was the only NPC you had a problem with killing you could always resurrect him with a console command (if you're on PC), after you get the quest update. You could RP that you approached Narfi to fake his own death or something? Not exactly how the DB would want things to play out though, and it makes you a very complex and unstereotypical (ie unreliable and whacky) assassin.