It seems to me that -by Law- the NE character was within his rights to defend himself.
1. Depends on the law
2. Adventurers that stick around in one place for long are usually dead adventurers because it's their jobs to do things that piss off powerful people that generally do have power bases.
3. Point two is more prevalent for evil characters because good characters of any renown are usually tougher than similarly inclined evil characters per the old axiom:
The forces of evil are legion and weak while the forces of good are few and strong. (of course PCs may be the exception if they are evil, but the standard fantasy tropes are what they are.)
If the town is neutral:
Word gets around. Certainly the majority won't care much to say anything to the evil Swordsage, but I expect that the following will happen.
a. Those of lawful good alignment are going to be negatively disposed towards the character and his known associates. They may go to very extreme lengths to ensure that the innocent are protected but are very likely to measure their options before addressing him.
b. Those who were directly associated with the dead paladin are going to want blood, in the short term.
c. Those who were loosely or professionally associated with the dead paladin are going to respond in some way depending on how important he was. Friends may want blood, others may want justice. Higher ups will not want the random slaying of one of their own to reflect on the reputation of the order.
d. Neutrals will be cautious around anyone who kills someone in broad daylight in a tavern with no concern for witnesses. The thieves' guild will likely move operations out of the tavern for a while if any exist (thus costing them some money) and some may not want to do business with him simply because he causes trouble.
e. Anyone with an agenda against the paladin or his order may, quietly reach out to feel the character out. Certainly not all of the outcomes result in punitive things happening. Brazen-ness causes curiosity.
f. Less good types will either avoid him to keep their own profile low, start rumors that they really killed the Paladin to better serve their purposes and annoy the PC, see him as a threat to their own power and squash him or try to use him to further their own ends.
g. Either way, bards will start spinning tales about the death of the paladin and where that goes will amplify the above over time as the word of mouth spreads to other townships. See point about adventuring groups needing to move around.
Personally, I'd be doing all of the above and then at some point months later in the timeline create a nasty storyline where the player (after having done something else equally evil) be brought before a tribunal of some kind where he's given a choice of either serving a significant prison sentence or taking on a quest to kill some significant good being of ridiculous power because the ruling body of Lawful Evils heard about how "he single-handedly bested the epic level leader of the Knights of Heironius in mortal combat" when he was off-handedly slighted in (insert name of town here).
Bards love playing telephone.
Seriously, the only rule should be, that your player did something really cool plot wise and you shouldn't miss the chance to have it affect things later. There's no rule that says the response has to be immediate.
