Wow! So this being my first playthrough of Gothic 2 I was aware that the game throws in a couple of "screw you" quests just to mess with you and see if you understand the world (from playing Gothic 1 I learned it the hard way) but what I was not prepared for is that guy Canthar. I didn't fall for his scam selling me a city pass but later on when he asked me to blackmail Sarah I refused and when he threatened me I just dismissed it (big mistake). Another mistake I made was not pushing the issue further and taking it up with either Sarah or the militia. So now the scrawny bastard is blackmailing me for 500 gold (which I dont have being just a level 3 as I am) and of course no merchant of worth is selling me anything since they found out about my past. Further infuriating is when I did a little search on the quest was me finding out that I missed my chance for payback with the guy and now I'm just going to have to bite the bullet and come up with the money.
What can I say I suppose I got mine. But I'm definitely coming back for the guy once I'll train up to actually do anything worth a damn. I have a fireball with his name on it.

Have you tried telling the paladin and the leader of the town militia (his name escapes me)? But yeah, he's a real bastard, but nothing compared to some of the guys you'll meet later on ;)

Well since than I restarted to spec out my 2 hand sword proficiency but yeah that's just what I did, he went to jail and that was somewhat satisfying for a while but than in the end the same thing happened he got out and I had to fork over 500Gs. By than it wasn't a big deal though. I heard some of the guys on the other forums actually went into his jail cell and killed him but I never cared enough to try that.
Oh and so far im 20 hours into the game and I have to say he's the only one who somewhat "got to me" in that way everyone else you can somewhat foresee that they're going to try and screw you over or at least up till that point I was able to do that.
Loving the game so far though especially now that I got dragon slayer armour. :)

If I recall correctly you can avoid this quest altogether by wearing the farmer's clothes when you first talk to him on the road. This is only necessary the first time; after that you can wear whatever you want.

That's pretty cool. All though 22 hours into the game its a little late for me now. :P I'll do that on my second playthrough if I don't forget.

Its actually pretty easy to kill him in jail, even at a very low level (i did this at lvl5):
Shoot him with a bow and run to the nearest guard - avoid getting hit and let the guard take him down. He will then steal Canthar's weapon, leaving him a sitting duck.
When he returns to his cell, simply attack him and kill him (try and draw him out of sight of any guards before you make the killing blow). You'll have to pay a fine to Andre (in the next room) for starting a fight, but you've saved yourself 500 gold...

If you've helped Ignaz with his little test you can simply make the guard forget the whole thing and thus avoid any fines altogether...

One strange thing about this quest is that it will automatically fail if you take too long to do it. I'm not sure what the conditions are, but later on in Chapter 1 Canthar will automatically replace Sarah (unless he is dead); this will happen if you chose to imprison either merchant, but it will also happen if you haven't reported either person or even if you haven't run into Canthar in town yet. Regardless of what you did or didn't do leading up to this, once this point is reached he will take over Sarah's stall and tell the other merchants that you are a convict.
This is why it is best to deal with the quest quite quickly no matter what you decide to do to solve it.
When I did this I stood in one of the bottom corners of the cell (where the guard cannot see) and struck Canthar down, then immediately gave him the coup de grâce. The guard didn't notice, so Andre didn't demand a fine.

I got Canthar locked up and I suceeded in killing him in jail before I spoke to Pedro. I think speaking to Pedro must have triggered something but the merchants now refused to talk to me and call me an ex-convict, and this is AFTER Canthar's already dead! The thing is, I've sold the gold chalice in "The Man With the Eyepatch" quest to Hakor before I started on it and need to buy it back from him in order to complete the quest. But he doesn't want to deal with me. Help!

Baah! Maybe its because I'm using NotR but the guard (and Lord Andrew) did nothing. I retried from a save several times - the guard just sits there and the Lord just moves out of the way. I think you are hosed. I heard that what you did triggers an early release of Canthar but with him dead and the trigger still happening, you might just have to give up on some of the minor quests and move on. I refused to pay the 500g and finished the game missing several quests. Its really funny that a member of the High Order of Innos and higher in rank then a Paladin is not treated with respect.

I wanted to do "both quests", I've convicted Sarah for the XP and weapon, and then I've tried to "confess" the truth to get more xp and another weapon (and then kill the bastard) - but sadly I didn't see such option :(

Maybe it's one way OR the other, can't have both :(

HAHAHA I love the first post in this thread.

"Fireball with your name on it."

You have to pick one or the other. The same goes for any other quest where you can decide whether to report someone's crimes.

Even if you report him, he eventually gets out and blackmails you for the 500. BTW, you get a better weapon from Sarah.

In my playthrough, the $500 blackmail actually didn't matter...I was buying my weapons from Bosper, and I didn't really care about any of the merchants who stopped selling to me.