Try talking to the king again, then the smith. You should be able to tell him you have the breastplate and gem, and he replies something to the effect that he finally has something to challenge his skills.
If that does not help, the technique used in the post below would probably get him to accept the armour, but I would need to get the dialog file from an appropriate point in one of my old saves. Let me know if you want to try it.
FIX for broken Imp Council Member quest
