The dark stain is an oxide, and you are sanding it into the grain of your stock. You may have to switch to using a Dremel Tool to sand, and polish the inlay, after taping the stock around the inlay so you can polish to the edges without worry about overruns. Steel wool will take the stain out of the wood, if you are careful. I would tape the inlay before working on getting this out of the wood, unless you remove the stain before returning to polishing the inlay. Try wetting the wood where the stain is with hot water in a rag, so that it lifts a little. Then let it dry, and then use the 0000 steel wool lightly until the stain is removed. If the wood is smoothed before all the stain is out, rewet the wood, and repeat the process.