I was stuck there for a while as well on my first time, which puzzled me somewhat, too.
By the way, it's really funny when you get there on your second game, with all the items cheated on your characters from the end of the previous game. If you have the quest reward on you, the beggar jumps right away to the solution of the quest in his dialog!
http://www.gamebanshee.com/ubb/wink.gif