The year is 1052, the place is Swelteredrings, in the Fingers of Turmoil, and Sigun Earthtower, Legendary weaponsmith, is tasked with producing iron swords to fulfill a Duke's mandate. He is unhappy due to his fisherdwarf wife's death by carp. He produces two exceptional swords, so far so good, but as he starts on the third sword he feels strangely inspired, and abandons the normal course of work, shutting himself down in his workshop and ranging far and wide for necessary materials. Lo and behold, The Autumnal Blizzard-Boulder is born, an iron sword. It menaces with spikes of carp bone. It is encrusted with glowing symbols of power in goshenite. It severs limbs with -every blow-.
But what is this!? Goblins attack! One elite swordsdwarf grabs The Autumnal Blizzard-Boulder and, almost singlehanded, defeats two whole squads of goblin pikemen. Hurrah! The corpses are hastily carried back to the dump near the bonecrafter workshops.
A month later, goblin zombies with several missing limbs shuffle and hop and crawl out of the dump, seeking a feast of flesh.
On the dread Winter of 1054, it happens again.
Only after the horrendous zombie troll mishap of 1055 is it decided that the corpses of monsters killed in combat with The Icy Constructs (the squad containing the wielder of The Autumnal Blizzard-Boulder) should be dumped in the magma, to be on the safe side.
...
So what have we got?
Legendary skilled dwarves should be able to create artifacts outside of one-in-a-lifetime accidental occurrences. There is a tiny tiny possibility that Legendary dwarves can be inspired to create Artifacts in the course of their ordinary work. If the task they are performing fulfills a noble's mandate, that tiny tiny chance is increased (though it remains tiny, this gives nobles a bit more of a reason to exist).
Artifacts could have explicitly magical powers beyond their mere Artifactness. I really really like the OPs ideas, and would just like to see them expanded. The principle (Magic = Artifacts and Moods) is brilliant, however.
Artifact effects could be divided into generic powers (available to any item), class powers (furniture, weapons, wearable item powers) and item powers (beds, crowns, maces - this is what the OP had in mind). There should be several different effects possible for every class/item. One crown could grant the user extraordinary conversational skills, another might make him King (brilliant idea by the OP) another might make all purring maggots on the map become his pets (All hail the King of Purring Maggots), etc.
There could be a big list of possible effects. These could be divided into tiers of outlandishness/rarity, with the more common ones occurring more frequently. They could also be associated with different spheres or themes (such as the ones listed under deities).
Items could be cursed, which is to say, there could be a list just like the above, only full of negative things. There would be a small chance an item would be cursed, a chance which could increase if: the dwarf making it is Possessed, the dwarf making it is unhappy, the item is the result of a macabre mood, the fortress is located in an evil place, the item is exceptionally powerful.
Curses could be something like the story above (for a really high-level curse), or they could just make the owner's temper worse, or make other envious dwarves begrudge the user, or make him more likely to suffer specific types of injuries, whatever.
Ideally (and this is really going over the top) occurrences such as the death of a relative or the vicinity of magma, or something might push the dwarf towards a particular theme (death, or fire). The dwarf's chosen deity might affect this too. These things would influence the choice of effects from the list above. Overcomplicated? Indeed. But this -is- Dwarf Fortress. I doubt something like this could be fully implemented, and all the little effects are definitely Bloat, but hey...
Other things that might increase the likelihood of magical stuff happening could be, say, the use of Alchemical materials (materials made in the Alchemist's laboratory) or Adamantium. All sorts of things that could be added as modifiers to the base odds involved, really.
...
This still leaves the creation of magical Artifacts out of the player's direct control, but maybe a little less random. And it still leaves magic as, largely, an extension of the craftsdwarf's innate skill, which I think is a cool theme. The specifics, runes or engravings or magic stones, or whatever, are kinda secondary as far as I'm concerned. They're the menacing spikes and hanging rings of magic, which is to say, decorative.
The system -behind- the magic would be more complex than the OP suggests, but it would be pretty much the same from the player's POV. Moods happen, magical artifacts appear. These would just be more varied and tailored to the specific circumstances.
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Now, if you absolutely must have more control, you could have another skill, and you could give a specific magic-using dwarf (however defined) orders to enchant/empower/magic existing items (the items would have to be Masterwork quality at least, say, to still have dwarven magic tied to skill). I'd probably have this only produce items with minor powers, however. And add there's a high probability of failure, with a small possibility of cursing the object, or even destroy it. The masterwork object. Because that makes for hilarious tragedy, and that's Dwarf Fortress.
Alchemy's also good as a source of magic stuff for dwarves. I wouldn't want a system where you end up micromanaging things like giving the potions of strength to the haulers, but I'm sure something a bit more organic could work, and use of ointments and potions to accelerate healing or whatnot could be automated, for sure.
...
Simple? Nope. Elegant? Nope. But isn't simple elegance overrated?
[ March 24, 2008: Message edited by: death_cookie ]