Kraken begins this battle standing in a pool of water. You can drain it by attacking the two chains marked in green on the mini-map. You can now enter the water and walk normally. Attack the Kraken with physical attacks. If you have Phyress, make sure she is using Flame Shot -> Flare Blast ->Shrapnel Shatter to deal maximum damage. A Sorcerer with Lightning Bolt is also a good idea for the battle, like Alm if he was received at Serdberg, but Fire Storm will suffice. Rufus with a Thunder Arrow thrown in is also deadly.
When the Kraken gets low on HP, he will toss around the Great Magic Tidal Wave. Remember, this hits EVERYONE regardless of their position. An Iceproof Trinket, or an Iceproof Talisman found in this dungeon will give you protection from the dangerous attack. If not, use a Dwarf Tincture to heal up. If you are fast enough, he should only get to use the Great Magic once or twice.