It is first found on the floor in the first room of the tunnels. The knife is used here as part of a puzzle to open the door, along with an Obsidian sword and Obsidian mace. To open the door, the mace must be placed on the western pedestal and the sword on the eastern pedestal.
The knife is also one of the weapons found on the floor of the fourth room of the tunnels. However, it is not needed to open the door.
A knife is used once again seventh room of the tunnels. It should be placed on a pedastal marked "Xil" and "Hur".