Essay to go with
Catcher's, I suppose, since we're posting together soon! But I actually wrote all of this yesterday so any similarities are entirely coincidental incidental to the characters.
What happened in camp
Basically, I'm assuming that being eaten by the wolf separated Medusa's soul from her body entirely. Her body then didn't last long without it (under the assumption that her body is Not Normal, and largely made out of snakes and magic and things that can't sustain themselves without her soul there). However, canonically, her body being destroyed doesn't... actually incapacitate Medusa. >_> So her soul was lost in spacetime for a while, went through a canon update, and when she got pulled back it was in a new, borrowed body. A body that's five years old.
Relevant bits of canon - MAJOR SPOILERS
For people who don't care about spoilers or have not spent the hours studying my canon that I have. ^_^;
At the climax of their battle, Stein cuts Medusa entirely in half. At that point the parts of her that aren't the top half of her torso or her head sort of... liquify, and rain down as blood-arrows. However, she is still at that point NOT DEAD, and manages to bite Stein's shoulder and tell him she loves him before he throws her to the ground again and slams a scythe blade through her head. The rest of her body then falls apart as well. Notably, her soul is gone as well - generally it would stick around to be eaten, but Spirit says that it must have been completely destroyed. She is at this point assumed to be dead. YOU WOULD THINK. However, we see a suspiciously arrow-covered snake leaving the scene. This is the point in canon I took Medusa from originally, with camp providing a new body for her like it does for actually-dead people.
Later, however, we have an idyllic scene with a mother and her young daughter walking through town. The daughter sees a puppy in the alley, and goes to look at it. The puppy looks at her too, and while the mother can't see, a snake leaps from the dog's mouth down the girl's throat. The mother calls after her, but the girl just turns and smiles and acts like nothing is wrong. Cue a bunch of creepy scenes with the girl and her mother at home, where the girl acts very strangely and the mother gets progressively more concerned/freaked out, culminating in the girl crushing a fist-sized spider in her hand ("Arachne has realized already") and walking out of the house while the mother yells but doesn't follow.
When next we see her, she's walking into Arachne's castle, and it's much more obvious that she's Medusa. In the anime it's particularly dramatic, as her hair and eyes have changed to look like Medusa's, but in both anime and manga the hoodie she was wearing has morphed into one more like Medusa's normal witch outfit. Exposition goes here, as Medusa explains to Arachne how she survived - she had to avoid her soul being eaten above all else, so she broke it apart, and then managed to reform herself inside a snake and escape. Arachne says there were exceptional circumstances there, and Medusa agrees - the kishin being revived raised her magic power; she wouldn't be able to do it again. Arachne says that Medusa's current form is kind of pathetic, and Medusa says "but isn't this form great for deceiving people? ^_^"
Much later Medusa turns herself in to Shibusen in order to make a deal with them. I'm not updating her that far, but it's important to motivation - she tells them they can't hurt her because her body is borrowed (and thus a hostage), and that she's only keeping it until her magic power returns, and will return it eventually. Also notable is that for all her claims to be low on magic power and unable to get out of restraints and such, she still seems remarkably powerful (in the literal sense - people remark on her power) when it comes down to it.
Some more details on motivation
One thing I like to note is different between the manga and anime is the particular way in which the creepy scenes with the mother and her daughter play out. In the manga it is really clear to me that you're supposed to think Medusa is going to take the mother's body. The snake has already switched once already, and the mother is physically very similar to Medusa, so she seems like an appealing target. Compare
the scene with the dog and the daughter with
this scene with the daughter and her mother. The anime makes the parallel much less obvious. But either way, I'm pretty sure it was a conscious decision on Medusa's part to stay with the five-year-old - because it makes her look weaker, and a child is a better hostage.
This is true enough in camp, too. Between Stein and the CFUW game, she's gotten to the point where a substantial number of people are aware of what a horrible person she is. Being small and adorable for a while won't hurt! ^__^ So... she's not terribly upset by this development.
On switching back
I'm not going to be tiny!Medusa forever. But this is slightly tricky, because, er, she's still tiny in canon currently. Still, she has said she'll give the girl's body back when her magic power returns, so presumably she has a plan for returning to her normal form.
Probably, if an elegant in-camp way to turn her back has not presented itself by the time I'm bored with it, I will just assume she has regained sufficient magic power to make herself a new body. Canon is sketchy for this, but Arachne manages to reform spiders into a body, and Medusa magicks up her snakes somehow, and they're both more than 800 years old and Arachne makes bodies seem kind of like optional/transient things for them, so... it's plausible, I think. And if not *handwave*... it's camp.
tl;dr: It's a canon update, not a de-age, and therefore Medusa will be in the body of a five year old until she gets tired of it. :Db