Several other games (World of Warcraft comes to mind) offer the option to abandon quests. When the quest is abandoned quest items are removed from the player's inventory and the quest is removed from the player's journal. At that point the player has the option return to the quest-giver and accept that quest again. Under this system - which I feel is the way it should be done - neither the quest nor the quest items associated with that quest are permanently lost to the player.
That works well, actually. It wouldn't work for every quest though - the Stones of Barenziah, for example? Resetting every stone to its original position just to clear out your items or journal would be immensely infuriating.