Rakanishu's Blade is a drop from a randomly spawned event in the Dahlgur Oasis or can be bought on the Auction House (search for level 16 magic sword). It is purported to be the weapon of the Fallen "demigod", Rakanishu.
It is not located within a dungeon, but can be found in the open, explorable world of the Oasis. Spawn points may vary, but it can spawn in the Southeast portion of the map from the waypoint.
The blade is a guaranteed drop (only on Normal difficulty) from the Shrine of Rakanishu event, which gives you an achievement for Act II's campaign, and a bonus achievement when completed in a cooperative game. Upon slaying the Avatar of Rakanishu that spawns at the climax of that event, the blade will be dropped.