Grizzly
comes from the Middle English adjective grisel, meaning "gray." Like
its close relative grizzled, grizzly means "sprinkled or streaked with
gray."
In
other words, the grizzly bear got its name because the hairs of its brownish to
buff coat usually have silver or pale tips, creating a grizzled effect, not
because it causes terror.
Grisly
is related to Old English grislic, which comes from a verb meaning "to
fear" and which gives grisly its "terrifying" sense.