Why can't I use the Staff of Sheogorath?

After beating the main quest line on Elder Scrolls Oblivion: Shivering Isles you get the Staff of Sheogorath.

When used against hostile creatures it freezes them, but I can't kill them either with weapons or spells. Why?

According to the wiki page on the Staff of Sheogorath:

Anything that is frozen by the Staff of Sheogorath cannot be attacked and will be regarded as "unconscious."

It appears that this is simply the effect of the staff - enemies will be frozen, but cannot be killed.

This is useful if you are trying to get through an area without actually having to kill any enemies (eg quickly trying to get through a dungeon to get a specific piece of loot). You can also use the staff to escape if you are low on health by freezing the enemies and running away.