I haven't actually gone that far on KotN yet... but when anyone mentions that you're unworthy of something in Oblivion, it's usually related to one of 3 things:
- You have a bounty and are therefore a criminal. (turn yourself in and pay your fines)
- Your infamy score is higher than your fame score and are therefore evil (do more main quests and other good deeds to get your fame up and don't do so many DB and TG quests)
- You don't have a high enough level. Sometimes a quest requires you to be level 10 or higher but they usually tell you up front what level is required.
I'm guessing that it's one of the first two. Especially with a quest title like that one. They want an extremely good (not evil) person to complete a quest like this.
If none of this helps I can only think of two more things:
- Maybe you're a vampire (I can imagine they wouldn't approve of something like that)
or
- It's part of the quest somehow. You might just need to read the clues and journal entries a little more carefully. Maybe before the sacred artifacts can be worn there's one more thing you have to do.
I'm pretty sure it's the first too, though. Let us know how you get past it when you figure it out.
