The jar of decay is a rare drop from Vorkath who can be found on the island of Ungael.
The jar can be used on a boss lair display in a player's achievement gallery to have a display of Vorkath. Doing so requires killing his more difficult form after completion of Dragon Slayer II at least once.
Using most types of bones will result in the jar consuming them, with the chatbox message stating "The [type of bones] decay into nothingness.".
For an exhaustive list of all known sources for this item, see here
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