Are there any merchants in Legend of Grimrock? I want to know if I should hoard items or just drop the ones that I don't need.
There are no merchants or store in the game. Just throw away what you are not going to use or obsolete equipment.
Mount Grimrock is a murderous, desolate place. If there were any traders once, there are all long dead now
I would add that sometimes you might drop something and then find out later it's needed for some achievement (eg sets of matching armor) or in a couple of cases, to get certain secrets. For this reason I'd recommend doing a periodic "item drop", in a big pile, near the exit to the level, and marking the location on the map. This way, if you realise later that you need something it's relatively easy to go back and find it.