Erm...I'd imagine that you can't continue if you can't complete it

I'd suggest just going back to a previous save or something and giving more of your equipment to the guy. My cousin did the same exact thing when he went through this quest: Gave just a dagger because he missed the dialogue and didn't want to give his equipment away. He miraculously made it through the area.
If you don't want to go back to a previous save (or can't) then I suggest being REALLY sneaky with that dagger. You can find almost every type of armor/weapon at the embassy that's suited to your level if I'm not mistaken, so the entire place is fully stocked up with stuff if you're able to get around initially. Just be careful and use stealth to find stuff there that can help.