How about you just store who last dropped the item, and that person is allowed to pick it up without leaving a stench?
Doesn't solve trading issues, but would at least stop 80% of the pain
loftar wrote:
EDIT: There are greater flaws in the system as it is. I'd consider one of the greatest to be the aspect that gives rise to such situations as being unable to pick up something you dropped from your inventory while in someone's village, especially seeing how one isn't warned when walking into a village. Such things should and most likely will be altered in one way or another. I'm just not sure exactly how yet.