So basically for background purposes the story is set on an island so I don't have to deal with the rest of the world. But anyways, it is drawing on nordic and celtic mythology and technology, so about how big should the island be and how many towns could it support without overcrouding and borders touching? Thanks ;-)
Technically speaking Australia is an island and a continent. Greenland I believe is the next largest island on Earth. Both are capable of supporting many many many towns.
Hawaii (the island chain) which is much much much smaller has some 151 places you could consider to be "towns" or pieces of a larger urbanised cityscape.
As for borders, that is a loaded question. Many towns/villages were historically controlled by a single seat of power in the region. The border was usually provided naturally by the difficulty of bringing an army in good condition and sufficient numbers to overwhelm the defenses at the location.
This is why coastal towns were often independent of any central authority. They were capable of paying for heavy fortifications, the military to man it, as well as having the ability to survive long sieges afforded by having harbours.
Similarly many inland/highland regions with rough terrain were rarely incorporated for similar reasons. They had natural defenses that made it difficult to deploy troops in sufficient numbers and sufficient health to overwhelm the local populace. The only exceptions tend to be when the region was rich in mineral wealth which made it worth the effort.
So it is entirely possible for your island to be controlled by a single seat of power capable of projecting that power across the entire island. There would need to be effective communication infrastructure such as runners, riders, fast canoes, etc... as well as well provisioned, loyal military forces deployed over the island.
The power structure could also be federated by clans, or barons/lords, etc...
If you hope to have two or more powers on the island, you will need terrain that provides a natural border such as: deserts, marshes, mountains, broken ground, etc... to provide the initial separation till such time as they can properly establish fortifications.
The powers will also need to be naturally strong in their own region, but somehow incapable of projecting that into the other centers of power. Otherwise the region will destabilise as a warlord discovers that they can get two regions instead of their measly one region. Perhaps ensuring that sea-power does not project inland (lack of navigable rivers). Perhaps ensuring that horses or other animals confer no military advantage on most of the island.
The communication cost could also be used to reign in the centers of power. You would still have bloody conquests happening, but due to the ineffectiveness of communication across the breadth of the regions it would make the regions supremely susceptible to rebellion, or counter-conquest.