The elven merchant is more focused on bows, but can also have swords (and mithril armour, good for mages since it has a high armour value and low strength requirement).
That frost sword was a random drop. Stats are random even on items that are always in the game (the bat of striking and amulet of glory in the catacombs, dragon armour pieces, etc) or with opponents that always drop something when defeated.
The dwarven halls are in the mountains on the western side of the dark forest.
If you wait until you are done the quests in the dark forest (the ghost 'only' kills the travellers that are looking for a vase and the elves, other than the elven council member), you can take and keep the sword in the stone. You can also cheat to duplicate the sword and put one copy back.