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>Kol&#225;r, Hugo</Author>
         <Book>
            <Title>Katalog zn&#225;mok Rak&#250;sko 1850-1918</Title>
            <Edition>Second</Edition>
         </Book>
      </Item>
      <Item>
         <Author>Sieger, Hermann Walter</Author>
         <Book>
              <Title>Zeppelinpost spezialkatalog</Title>
          </Book>
      </Item>
   </Entry>
</List>

David