Crystaline Damascus steel. A sword needs two items, flexibility to not shatter (why you do not cut it from diamond) and hardness to hold an edge and do damage (why you do not make it out of pure iron). A skilled smith can make almost any carbon/iron ratio that he needs, but as he increases flexibility, it decreases hardness.
There are many ways to cheat this, such as differential tempering (the edge is harder than the spine, as on traditional Japanese swords), but the most effective way is what is known as damascus steel. You can tell damascus by its characteristic patterned design
. The best explaination I have read is at Angelsword
(I would also recomend their swords if you are willing to pay their prices).
[This message has been edited by Benjamin1986 (edited 10-18-2004).]