Right now, there's no magic in H&H, apart from well dowsing. I like the low fantasy atmosphere this give to the game, and would prefer it if we never got any flashy magic. However, I think we could use some subtle magic. So, I'm proposing a new skill, witchcraft, which would be raised like combat skills or stealth and exploration. I think charisma would be a fine choice for a stat to influence witchcraft, as it's currently the only useless stat and it's not that far-fetched thematically.
Witchcraft would determine how well you can interact with various spirits. "Evil" use for this would be binding bad spirits into possessions of enemies to place a curse, and "good" use would be for exorcising these bad spirits. Various spirits could be used to produce varying effects. For example, you might bind a certain type of spirit into a smelter to make it produce 50% less cast iron from ore.
Spirits could be found in the spirit world. This is like an extension of the physical world, ie the map and everything on it exists in the spirit world too, but in addition there are various roaming spirits (sort of like wild animals). Things from the spirit world normally don't affect the physical things, and vice versa. To interact with spirits, one would need to enter the spirit world. This would be done by ingesting a magical stew, possibly something with mushrooms and various rare plants.
Upon entering the spirit world, the physical body goes into the unconscious state, retaining all of it's hp. The player would now move with his character's spirit while the body remain behind, vulnerable to harm. To limit the duration of this spirit world trip, it would drain the hunger bar, meaning you could starve if you stay too long. The rate of hunger drain could be influenced by the witchcraft skill. Anyway, in the spirit world one would see only some spirits, depending on how high his witchcraft skill is. Using witchcraft as a sort of unarmed combat skill, one would be able to fight a spirit. If the spirit is defeated, it could be bound. Burning silk restraints in a prior ritual or something like that would be required to actually bind the defeated spirit.
A bound spirit could be transferred through the spirit world to the desired location and left there to cause problems. Like I said in that example, you could carry a bound spirit to a smelter to make it less effective. It would also be possible to bind spirits onto other player characters to cause various curses such as decreased accuracy or stamina regeneration. A check against the victim's magic skill would be required to bind a spirit to him.
Another method could be bribing spirits to do your bidding. To use spirits beyond your ability to fight, you would need to make a deal with them. A spirit might demand a regular offering of valuable goods burnt in a ritual, and would continue to haunt the object or character you want as long as you keep paying it.
To exorcise spirits, one would need to enter the spirit world and detect them. A check against the witchcraft skill of the character that bound the spirit would be required for successful detection. Then, one would either fight the spirit or bribe it so he could get to the magical restraints and sever them. This creates a possibly lucrative profession of exorcist, and less honest players could trick players into paying them to exorcise non-existent spirits, which I think would add a nice touch of medieval atmosphere to the game.
In addition to these "lesser spirits", I'm also proposing greater spirits, mostly guardian spirits of things like forests and rivers. These spirits wouldn't have a "physical" presence in the spirit world, but would act through minions such as lesser spirits or wild animals. Thus it would be impossible to fight such a spirit directly, but it's power would wax and wane according to the state of what's it protecting, so you could kill a forest spirit by cutting down all the trees and killing all the animals.
Angered greater spirit would fight you using lesser spirits to curse you and your possessions and would also send wild animals to attack you. If animals die to you too easily, it could instead ruin your hunting by making the animals move out of your way before you can spot them. On the other hand, a pleased spirit would help you in subtle ways. Spirits would be displeased when you degrade the state of what they're protecting (for example, killing too many animals or chopping down trees), and pleased when you improve the state of what they're protecting (for example, by planting trees). Using a natural resource and keeping it roughly in the same shape would slowly displease the guardian spirit, so small sacrifices would be required every now and then to remain on good terms.
To see how the spirits feel, one would contact them through rituals which would require rare/valuable ingredients. To succeed at contacting a greater spirit a witchcraft check would be needed, weighed by how willing the spirit is to communicate with you. This will to communicate would be decreased if the spirit was angry or simply feels ignored, and increased if rituals in it's honour are regularly performed. Upon successful communication, the spirit would make certain demands, and fulfilling them would improve it's mood.
Another type of a guardian spirit would be the hearth spirit. It would protect your claim from people seeking to place curses on it. The hearth spirit would require you to keep your property well-maintained and would get angry if you neglected it for too long (at least a real week). An angry hearth spirit wouldn't protect your property. The hearth spirit's mood could be quickly improved with small offerings. Offerings of valuable goods would increase your hearth spirits' power, thus making you safer from curses.
An even greater rank of spirits would be global spirits. These would basically be collective consciousnesses of various greater spirits, so for example you could have a global spirit who's mood is influenced by state of all the world's forests, and who would act in all the world's forests. These spirits would mostly serve as a basis for in-game religions. If they have opposing goals, this could provide a nice casus belli. Not least of all benefits of this is the possibility of scam religions. So you could have people walking around claiming to be priests of some global spirit and asking for donations to appease that spirit, only to take those donations for themselves. Generally, religion could spice up the game a bit and would provide a nice resource sink. Plus, it'd be funny, because a lot of people would start wacky religions. And it'd certainly be fun to try and kill the global forest spirit or something.
Anyway, this is all just a lot of rambling, not a single idea that needs to be implemented in it's entirety. I'm well aware that a lot of it is flawed, but if we can distil two or three useful ideas from this wall of text I'll be happy.