Try talking to the king and dwarven smith again. Did you bring both the letter and axe to the king?
I beleive ive shown the axe to the king,cant be sure tho because i've completed that quest with dwarven council member quite a while ago...Same goes about the letter,if you mean the one that proves it was not elves who stole the axe..
And i've been talking to Grisha a lot,since the sucker has some good armor & weapons,with many reloads because his stuff is random - already exhausted all my speech options with him,and he doesnt say a word related to dragon armor stuff...Can i still complete the quest if a gather all the items though?