How dumb is he? Using the other guys belief that the story is true, to gage whether it is true? He wouldn't have lived through it, so he would have only had whatever tale passed down. While sure, it doesn't prove either story is true, that's a dumb reason to believe his is more true. If someone had asked you a minute ago what you though happened, you would have told the other story with, apparently, the same level of conviction.
The priest's speech feel like a whole load of propaganda to me. It's irrelevant which story is true in the end. Frankly, it feels really dumb that he's
still trying to doubt her after all this time. I mean, really? Because of some story a thousand years ago Karina is the reincarnation of Medusa, a monster who will endanger the lives of thousands, so he has to kill her? Hmm...how convenient you're telling the Hero this story only now.
Regardless, it doesn't change the fact that one side wants him to live while another had a sword that was purposely trying to kill and absorb him this entire time and a group of people who are surprised that he's not willing to sacrifice himself "for the cause", even when there are still other options available.
If anything, the Church looks like the real warmongers at this point. It looks like their aim is to completely eradicate the demon race and leave nothing left. They clearly don't recognize demons as people or beings they should try to reason with (either that, or they simply don't want to. The head priest and the FL has been traumatized by Karina in the past so I wouldn't be surprised if they want to avenge their loved ones and kill her no matter what). At this point, the priest's story/prophecy is self fulfilling. Of course she's going to fight back if left with no other option.