Try playing with the diffuse and that sort of thing.
Only the material name matters in Blender. I could set the diffuse to 0 or turn on shadeless and it wouldn't do a thing.
What. I thought it would actually make a difference on which shades when you edit the colors, diffuse or transparency.
It kind of looks like you smooth-shaded it somehow.
The problem might be with your textures.Try using completely different textures, to see if it makes any difference. Like, red for the handle, and blue for the ax head.
Not a problem with the textures.
K. Did you try re-flatshading?