Before you begin, know that this quest can only be completed if you are a Paladin. See our article on becoming a Paladin for full details and be forewarned that attempting to save the Rusalka if you are not a Paladin WILL result in your untimely death! Now that you're a Paladin, let's go save the Rusalka!
Grab some flowers from around Erana's Staff in the town square. You use these a couple of times, so you might as well grab two or three.
Become friendly with the Gypsies in the southeast if you aren't already. The trigger for this is when one of the Gypsies gets caught in town and is locked up. Getting him out will get you into the Gypsy camp. If you don't know how to get him out of the bind, go to the graveyard and look for something amiss.
Head to the southwest and find the lake. When the Rusalka appears, give her the flowers and talk to her but DO NOT go swimming with her.
Head for the Gypsy camp and ask Magda about the Rusalka, then head to the graveyard and inspect the tombstones until you find the one about the drowned maiden and her fiance.
Head to town and buy a broom from Olga, then go back to the Rusalka and ask for one of her hairs.
Get ready to fight a Wraith. If you've never fought a Wraith, explore the forest at night. If you see a mound of rocks, run up to it. That will cause the Wraith to emerge so you can fight it. Be forewarned that Wraiths are very powerful and must be eliminated quickly, lest they sap all the life from you!
Go to the graveyard at night and sweep the grave of the drowned maiden's fiance.
Kill the unfaithful jerk, then go see the Rusalka again. Send her off with a kiss. If her appearance has changed, you'll know it is safe to swim with her. If she looks the same, you've missed something.