I'll stay away from the classics for this one. My favorite magic items are those that manage to establish a personal connection with the characters. Of the top of my head I'd go with the cursed halberd one of my players "created". It nearly made the "craziest moment" in the challenge, but it really was just funny as hell.
It all began with a fumble. The character was a level 1 fighter and they were exploring a cave of mutated goblins. Anyway, he rolled the "1" and at the time we still used the Arduin Fumble Tables. He rolled the d100 and came up with a 99:
|Fun fact: The Arduin Grimoire was the first to introduce Critical Hits and Fumbles into D&D (the scan was found here).|
He critted himself. With a halberd. Being level 1, he couldn't possibly survive it. And he rolled an immense amount of damage. What made us laugh so hard was the players look and his question: "But... how?!" We ever since try to explain how he'd managed to kill himself with a halberd. As of yet it's inconclusive...
But the weapon kept killing those using it.
I kid you not, the same player lost his next character with the same weapon and another (not so harsh, but it was enough...) fumble. The player didn't have the chance to make a third character (busy life and all that), but they carried it along and finally, another player started to use the weapon and (you're already seeing where this is headed) he killed himself with a fumble!
The weapon was cursed, they were sure of it. Nobody would touch it after that and they left it behind to kill someone else.
Does that count as a magic item? I'd say so and the players sure believed it, superstitious bunch they are.
After that we also stopped using the Arduin Tables.