Oh man, there's no way that this elf will not end up getting killed or escaping to become a recurring villain...
...Okay, actually I guess I see a third (albeit unlikely) option: the game turns into a courtroom drama. But other than that, this elf is gonna get it. I totally love this conflict between the PCs' self-doubt that what they did was just ("are they bad guys? Or just other people in the wrong place, like us?") and the hatred of the elf ("You just killed my friends; I don't care what you say, there's no way I'm going to help you!"). Both sides make sense, but put together I don't see a happy ending. It's really got me wondering what will happen next, and gives some great role-playing opportunities.