Ouch. Yeah, that lettering really makes this one a tough fix. The only thing I can think to do would be to apply tiny amounts Bondo spot putty (or a similar brand) to raise it back to the level of the surrounding paint. That will have to be wet sanded to even everything out. Once the entire thing feels even (or as even as it can be without sanding down the letters), painstakingly tape out the letters along with the rest of the hammer for painting. Then apply paint in very light coats until the putty is covered. You will likely end up with a paint line-circle just inside the lettering. You may be able to wet sand/blend that in once you are done, but that is risky since you could end up scratching the letters.
Or you could just paint it as battle damage, which I know isn't technically accurate to the prop, but it would sure as hell be easier and less risky.