You do need to find higher level BF keys in the main game to unlock higher level dungeons in the BF.
If the quest log was updated when finding those white rags, then they should be the correct ones. Try dropping the white rags and talking to the trader again, then picking up the rags. I have not been clearing the BF dungeons, so don't know if this is a common occurrence. Some people have had problems with the BF quests, but not in connection to dropping the quest items for awhile, that I recall.
