Also known as the Shikon Jewel, it was forged in the heat of combat between a priestess and a demon. The Jewel of Four Souls is said to amplify the powers of its wielder.
When a man lusts after a beautiful priestess named Midoriko, he is invaded by hundreds of thousands of demons, who merge into one terrifying being called Magatsuhi. Magatsuhi attempts to destroy Midoriko, and when she realizes that she cannot defeat Magatsuhi, she binds his soul along with her own into the Jewel of Four Souls, in which they continue their battle.
For centuries the Jewel was held by various humans or youkai (demons), until one day a group of youkai exterminators gave it to a priestess whose purity was said to rival that of Midoriko herself: Kikyo. Kikyo held on to the jewel until she met InuYasha, who was attempting to steal it. When Naraku-- a demon built of many smaller demons, like Magatsuhi --tricked both InuYasha and Kikyo, leading to Kikyo's death, the jewel was buried with her.
It was not found again until a girl from modern times, Kagome-- Kikyo's reincarnation --accidentally fell through a well and landed in the feudal era. The jewel was embedded within her until a youkai attempted to get it from her by clawing her stomach. At the end of that battle, the jewel was broken up into hundreds of shards spread all over Japan, which Kagome and InuYasha must collect.
In the manga, after a long period of time searching for the Jewel shards, InuYasha's group finally obtains the entire jewel. After being trapped inside the jewel itself, Kagome wishes the jewel out of existence, thus preventing its magic from causing any future chaos.