Here is the entry from Chambers 20th Century Dictionary:

grisly,  griz'li, adj. frightful, ghastly (Spens., Milt. greisly; Spens. griesly, grisely, grysely).  -Also adv. (rare). -n. gris'liness. [O.E. grislic; c.f. grise]

Spenser in particular was fond of using words and spellings that even in the 16th century, when he was writing, were archaic.  The use of griesly nowadays is rather affected, but all the same, it's an interesting-looking song.  No hint of any racial slur here, then, unless we're talking about prejudice against werewolves (or whatever the lady in question actually turned out to be).  There is a bit more information on a previous thread:  Tune Req: Griesly Bride

Malcolm