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That Hydra is a cool monster. That is a battle worth fighting!
As for the Sunken city, did you talk to the mermaid? If you ask her about the Oracle, she will open a sewer grate for you and that will open up the rest of the city to you. Also mention the Lost City and she will give you a gem that you need to open doors with.
One of the things that tends to throw me off is the fact that the city is three dimensional. I can swim upwards instead of just following the floor. There are a couple of places where you can breathe again and at least one or two chests that you can only get to if you swim up.
Good luck!
Knarfling
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