I think you just want to add two xsl:sort:
...
<xsl:for-each select="current-group()">
<xsl:sort select="Author"/>
<xsl:sort select="title"/>
...
saxon8 sort2.xml sort2.xsl \!indent=yes \!encoding=us-ascii
<?xml version="1.0" encoding="us-ascii"?>
<List>
<Entry>
<Subject>Catalogs. Austria</Subject>
<Item>
<Author>Kolár, Hugo</Author>
<Book>
<Title>Katalog známok Rakúsko 1850-1918</Title>
<Edition>Second</Edition>
</Book>
</Item>
<Item>
<Author>Sieger, Hermann Walter</Author>
<Book>
<Title>Zeppelinpost spezialkatalog</Title>
</Book>
</Item>
</Entry>
</List>
David
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