Dave, you might try removing the nipple and then lowering the hammer to check alignment between the hammer face and the nipple seat in the bolster. The two surfaces should be parallel. If they are, it looks as if you need a very short nipple upon which the hammer nose will strike squarely. To determine the correct nipple thread, take the barrel only to a good hardware store and see if one of their metric screws will fit the nipple hole properly. Then you will be able to order the correct thread size from a supplier such as Track of the Wolf. Should you be unsuccessful in finding the proper thread size your only option might be to drill and tap for a more easily obtainable size such as 1/4-28. It appears from your pictures you don't have much headroom to work with however.
Best of luck in your efforts to get the little guy back in business.