Deep beneath Vivec, Redoran canton, there is Daedric dagger (generic, unenchanted, worth 10k) next to a skeleton.

You'll have to fight some rats and an ancestor ghost, so come prepared with either magic or a weapon that is silver or better.
You have to go to Vivec, enter Redoran Waistworks, then Redoran Canalworks and finally Redoran Underworks.

The daedric dagger is next to a skeleton and an ash statue, like in the picture.

If you are confused by something, watch the included video. (Yes, I found this by looking for rat meat, which is why video is titled like that.)