> "Minnur mundi Þjóstólfi í augu vaxa," segir hún, "ef hann væri á

lífi að drepa Atla."

> '(It) would (have) grow(n) smaller in Þjóstólf's eyes,' she says,

`if he were alive to kill Atli.'

I see you all translated the idiom word for word, but I guess you
remember what it means from previous encounters? 'e-m vex (e-t) í
augu' "one is daunted (by something)".

> Hann brást við svo fast að Brynjólfur lét lausa öxina.
> He (Atli) turned so sharply that Brunjólf caused to let-go the axe.

I've a feeling 'lausa' is an adjective here, feminine accusative
agreeing with 'öxina': "He reacted so sharply that B. let go of the
axe." Lit. "let loose". The verb derived from 'lauss' is 'leysa'.

> Naust þú nú þess er eg var eigi við búinn,

'naust' < 'nauzt', 2nd person sg. past of 'njóta', in the sense of
"enjoy/have the benefit of" (which governs the genitive), so he's
saying: "you had the benefit of the fact that I wasn't ready/prepared."