Firstly, that letter is not a libel because it's addressed to him so any defamatory comment is not being published to a third party
Secondly, AuntieStella has it. Pick your battles.
Thirdly, just about everyone has it - don't engage. He has lost control so is trying to exert control by other means. To reply substantively like that is giving him what he wants.
In Scotland you do have to return an engagement ring. In England and Wales you don't (unless it was given conditionally). I don't know about N Ireland.
I think you have 2 choices -
Sell it and donate to a DV charity. Write to solicitor to say you are under no legal obligation to return it and it has been sold and the proceeds donated to xxx charity. Then go on to say
Your client is stalking and harassing me. He has been seen driving around the area in which I now live, where he has no reason to be other than locating my address. He has also been seen driving past and/or loitering around my place of work at 6pm, the time I usually leave. [add details of anything else he's been doing]. This letter from you, with a baseless demand for the return of a gift, is yet another example of this stalking/harassment. Your client is committing an offence under the Protection from Harassment Act 1997.
I require your client to cease contacting me, to cease trawling the area where I live and to cease loitering around my workplace. If this behaviour continues then I will have no choice but to report it to the police for them to take appropriate action. I may also consider applying for a non-molestation injunction.
Yours faithfully
I've checked and the Protection from Harassment Act is enacted in NI.
You could of course keep the ring but I agree with PPs that you shouldn't. It gives him another reason to obsess about you. Never mind that he "won" this battle, it's irrelevant to the big battle which is getting him out of your life and erasing all memory of him.