The battered key is found during the Elemental Workshop I quest. It is used to access the Workshop located under the building with the anvils in Seers' Village. You can obtain the key by using a knife on the slashed book you find in the house across the road from the anvils.
To obtain the Battered key after losing it, you can go to the house opposite the anvils and search the bookcase. After selecting the option "Click here to continue" the key as well as a Slashed book appear in your inventory. Duplicates of the key can be obtained by dropping the key and retrieving another from the bookshelf as the key does not have the 'destroy' option. However, you can only add one Battered key to your steel key ring.