I've reached the wizard's dream sequence, but upon receiving the item "Infernal Contract", I am unable to use it and I am now stuck since using the item is essential to progressing. I've searched for my problem online but apparently I'm the very first to run into this. This happens even with no overrides, no client extension.

Try moving and using the contract from the bottom bar and seeing if that works.

I've tried everything. Drop-down menu, hotbar, double-clicking, dropping it and picking it up again, restarting the game, deleveling myself to remove potentially interfering classes/feats, etc.

The item uses a tag-based activation script, so it would not be possible for any of your levels or feats to affect it. The choice to activate it would not appear if the script "i_d13_faras_contract_ac.ncs" is missing from inside the module D_X1.mod, which would be my first guess as to why it's not working for you. The script starts the conversation called "d05_contract".

This is the content of the script:

void main() {

object oItem = GetItemActivated();
object oPC = GetItemActivator();

AssignCommand(oPC, ClearAllActions(TRUE));
AssignCommand(oPC, ActionStartConversation(oPC, "d05_contract", FALSE, FALSE));
AssignCommand(oPC, ActionSpeakStringByStrRef(210857));

}

You could activate the conversation manually with a console command, but the real question is why that script would be missing in your game.

What would be the command to manually trigger the script, if the script did actually exist?

I checked with the toolset to make sure the script and conversation existed, and they do. I called the conversation via the console as a workaround, now all is well. Thanks for your help!

Which did you use? Checking to see if the script exists in the toolset would not tell you if it exists in your saved game, unless you opened the copy of the module that's stored in your saved game folder.

The fact that a copy of the module is saved with every saved game is why you can't make certain changes to a module and see their effects in a saved game in progress.