Found another bug (and unfortunately I idiotically saved after it happened) When you give the Mountain King the gold nugget, he just treats it as a regular gift instead of giving the magic axe. This happened if after I gave him a bunch of gold right beforehand.
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Oof, I just tried this in the GoG version of the game, and he doesn't check what you have in your inventory, he just says "that is indeed a goodly gift", even if you are carrying nothing! It depends which conversation path you take. So unfortunately this is a bug in the original conversation code. I might be able to patch it but it's low priority.