Not sure about this answer. I think you have to talk to a Dwarf in the Dwarf village. Forget his name, but he'll be dressed all in white.Usually he's near a big shrine.He gives you the axe quest? Then talk to the drunk Mayor for a password to get past the guardian.[you can just kill it too]You may also have to talk to a Elf, who is tossed in the jail, in the village.
