It is unknown when the Jewel came into Tharn's possession or who created it.
When the Eternal Champion came to the Imperial Palace in 3E 399, they delved through they building to kill Tharn and save the Emperor. Upon reaching him, the Champion defeated Tharn who then activated a magical shield around himself. In order to kill him, the Champion used the Staff of Chaos on the Jewel of Fire containing his lifeforce. This opened a portal to the dimension in which Uriel Septim VII is imprisoned and killed Tharn by turning him into fire and ash.
The Jewel is located within a cell and must be destroyed in order to kill Jagar Tharn.