Presumably "Villan" is thinking of the arrangement recorded by Fairport Convention, which has been pretty influential over the years. I don't recall where they got it from, but the information may be in one of the past discussions shown above. Because the recording has been so widespread, people tend to think of that form of the song as particularly authoritative, rather than as what it really is: just one of a great many variants.
There's no point in making guesses about a 17th century song (posssibly late 16th, though there is no record of that) based solely on a single commercial recording of the late 20th century, of course. For what it's worth, Sandy Denny certainly sang "not" rather than "but" on their recording, so in that sense, and in this single case, "not" is correct. Of course, a lot of people sing the song much as learned from Leige and Lief, probably in many cases not even knowing that's the source; and doubtless many do sing "but". It's a late development though, as a brief look at the history of the song shows. My comments are only based on a quick look through 88 examples (Child and Bronson); of course there are more than that.
Of the many examples noted or recorded from tradition, hardly any mention pocket knives; and the very few that do are relatively late American versions. Usually the reference is just to "a knife", and the understanding is almost always that he doesn't have even a knife with which to defend himself.
The oldest known examples (the first known broadside edition was printed for Henry Gosson of London, early 17th century) don't refer to the episode at all. Lord Barnet simply tells Mousgrove to get dressed, and offers him a choice of swords without Mousgrove having spoken a word on the subject. The knife episode is likely a later addition for increased dramatic effect; only one of the texts in Child (81.I, from Motherwell's MS, and presumably of the later 18th century; it was noted in 1825 from an elderly woman who had learnt it from her mother) includes it.