Water Palace
You are called back to the water palace. When you go through the Mysterious Forest, you can now use the whip to swing across a gap and take a faster shortcut. If you wish to gain experience, you are free to take the longer route as well.
When you reach Luka, she will heal you, and mention that the seal on the Water Temple is weakening. You will need to enter a cave to the east of the temple and meet Undine.
Undine's Cave
Undine's cave is initially protected by Iffish, appearing in groups of three. When you proceed north, you will encoutner the Tonpole.
The Tonpole is a small enemy, which will simply hop around and damage characters it enters contact with. When it takes enough damage, it will transform into the Biting Lizard.
Neither of these two bosses are a threat themselves, and are easily defeated using continuous attacks. While the Biting Lizard will attempt to self-heal, it only does so twice.
When the Biting Lizard is defeated, a cave is opened to the north. After speaking with Undine, you will have obtained a Glove orb, the Polt Dart weapon, and the ability to cast water magic.