My memory is fading but (and I read the give ax to the king thing too) I don't remember ever having to fool the game to get by the guards stripping the ax from you. I believe I gave it to the councilor and an option came up with the king to tell him I found the ax (or he states to me that he knows I found the ax or something like that). I don't remember what I did with the letter. I don't believe that all is lost with you completing the task but, unfortunately, I can't remember the details.
