It looks a lot more old-fashioned than the frag grenade and also has a small cross on the top. Its real advantage over the frag grenade comes from the large increase of power and longer throwing distance.
It is possible to acquire this weapon in a special encounter where five knights in power armor are fighting a rat. Sneak past them into the cave or wait until only the rat is left. The rat can only be killed by the Chosen One and/or companions hitting it in the eyes. The Grenade is in the cave behind it.