I can understand your confusion, Loki. The description of the power is, indeed, worded in an complex way. But you are, nonetheless, mistaken in your interpretation. Bagpuss and Hypersmurf have both spelled out very clearly why you're mistaken.
I do, however, think I know what the source of your confusion is, so I'll take one more stab at it:
The key concept, which I believe you're missing, is that the first line of the power description immediately comes into play
EVERY time the Divine Challenge ability is used, even when the only reason you're using it is to fulfil the "or challenge a different target" option.. Here are the consequences of this:
(A) As per the beginning of the power description, if you use the Divine Challenge power then "you mark the target. The target remains marked until you use this power against another target, or if you fail to engage the target (see below)."
This means that the Divine Challenge ability persists until either (1) it is used against a different target or (2) you fail to engage the challenged target.
(B) Paragraph 3 discusses the restrictions placed on the paladin when he uses this power. It states that as a result of using Divine Challenge, "on your turn, you must engage the target you challenged or challenge a different target."
So, the paladin must, on his turn, either (1) engage his target or (2) challenge a different target. This restriction applies
EVERY time he uses Divine Challenge.
(C) The second sentence of paragraph 3 defines what the paladin must do to fulfil the "engage the target you challenged" option. It states, "To engage the target, you must either attack it or end your turn adjacent to it."
So, if he goes with the "engage the target you challenged" option, the paladin must either (1) attack the challenged target this turn or (2) at least finish this turn standing next to the challenged target.
(D) The third sentence of paragraph 3 defines the consequences for failing to fulfil either of the options from (B). It states, "If none of these events occur by the end of your turn, the marked condition ends and you can't use Divine Challenge on your next turn."
So, if the paladin reaches the end of "his turn" (that is, if
ANY turn of his, including the current one, comes to an end) without fulfiling either option from (B), then the power is negated and is rendered unusable for one turn.
STEP-BY-STEP BREAKDOWN:
#1. Turn 1: The paladin uses the Divine Challenge power on a enemy. This brings him to situation (A) and imposes the restrictions of (B).
#2. He cannot fulfil (B) by challenging a different target, since he can only use Divine Challenge once per turn. He must, therefore, fulfil the other option - engage the target.
This takes him to (C). He can either attack it before his turn ends or finish his turn standing next to it. If he does neither, he suffers the consequences from (D).
#3. Suppose he does engage it successfully. This means that the target, as per (A), is still challenged at the start of Turn 2.
As per (B), this means that the paladin must again fulfil one of the two options of (B) to avoid negative consequences.
#4. Suppose he chose to again use the first option - engage the target. This will play out like step #2 above. If he engages successfully, this takes us back to step #3 above. As per (A), the target will still be challenged at the start of Turn 3 and the paladin must again choose how to meet the restrictions of (B).
#5. Suppose instead of engaging the target at step #3, the paladin chooses to fulfil the second option of (B) - challenge a new target. He has now activated the Divine Challenge power anew. This takes us back to step #1 and brings about the situation of (A):
The Divine Challenge ability persists until either (1) it is used against a different target or (2) you fail to engage the challenged target.
and the behavioural restrictions of (B).
Like at step #2 above, he cannot meet the restrictions of (B) by challenging a new target since he has already used Divine Challenge this turn. He must, therefore, engage the target before the end of his turn in order to satisfy (B). If he does not, then he suffers the consequences of (D).
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And that's it. If he challenges a new target on his turn; but doesn't engage it on that same turn, then he suffers the consequnces. This is because challeging the new target is
itself a use of the Divine Challenge power, bringing him back to step #1 in the cycle and imposing the same restrictions as if he had used the power for the very first time. And, since he has already just used the power once this turn and cannot do so again, the only way to meet those restrictions is to engage before his turn ends.
There's no room for debate here, the rules are very clear once you spell them out. They've now been spelled out for you three different ways by three different people, so hopefully you can see what we're getting at. If you still don't, however, then I don't know what else to tell you.
