This is the boss of the Lakebed Temple. Upon opening the boss door, you fall through a hole into the floor into a massive underwater chasm; the boss lurks at the bottom, buried in sand.
To start the fight, quickly target the moving eye and clawshot it; you have about a second at the beginning of the fight to get some quick hits in. The way to win the first half of the fight is to simply clawshot the eyeball while avoiding his tentacle attacks / water bombs, then attack it with your sword. If you see one of his tentacles lay down next to you, immediately slash it with your sword to avoid getting grabbed. After a few sword slashes to the eye, Morpheel emerges from the sand and starts the next phase.
Unequip the Iron Boots and begin swimming upwards. Try to stay above him in the water, and try to float near his head. You see that eye on the back of his neck? You need to clawshot over to it and slash it. As long as you stay out of his way, you won't really need to worry about getting swallowed or anything. Pretty straightforward.
After the battle, you earn the third Fused Shadow, and a dark cutscene involving Zant and Midna unfolds.
