The Bottle Grotto is the second dungeon. To enter the main part of the dungeon, you must have at least two doses of magic powder. However, you can collect extra powder once you manage to enter the dungeon.
First, you must equip magic powder. Then go up to the next room. An spark will be circling around the room. Go to the empty torches and use the magic powder to open the door to the right. Proceed through the door.
Defeat the two Stalfos, and collect the first key when it drops from the ceiling. Head left, and open the door. When you go through the door, wait for the traps to trigger before passing through. Defeat the two Keese and head north. Jump over the gap, and knock the Hardhat Beetle into the chasm. Open the chest to collect the Stone Beak.
Head back, and go one screen right from where you found the first key. You should see a blue crystal, which may be struck to raise or lower the obstacles. Strike it, and head south. Strike the crystal in that room, and open the chest to get another small key. This allows you to access the locked door you passed earlier. Enter that room, and defeat the shy guy by facing away from it, holding your sword, backing towards it, and making a spin attack. This reveals a chest containing the Compass.
Now, return to the stone owl room. The path right is blocked, but contains a key you need to collect. If desired, you can try backing into the wall to trick the shy guys to approach, and defeat them to instantly drop a key. If you can't do this, then you will have to back track.
From the stone owl room, head south, then east. Jump towards the button in the south-east corner to reveal a chest, which you can open to collect a key. Continue north and defeat the Shy Guys if you haven't already (although you will have to backtrack for the key). Head east and equip a shield to repel the Spiked Beetle.
Head north and push the blocks towards each other to reveal a staircase. You will need the Roc's Feather to jump in the underground area, and once you surface, jump to the middle island and collect the piece of heart. Proceed north.
Hinox is a miniboss, but it is quite easy to defeat. His main attack is a charge towards you before grabbing and throwing you (possibly into a weak floor). When he signals his attack and charges, swing your sword to hit him. He will retaliate by throwing a bomb. You should be able to approach him now, and attack again and dodge any bombs he throws.
When he is defeated, a portal between this room and entrance is now usable, and you can continue right.
Map and Power Bracelet
Jump across the gaps, check the owl statue for a clue, and turn north. Wait at the entrance first. A Vacuum will start pulling you to the corner. Wait for it to stop, before heading to the chest to collect the map. When you have the map, you can jump across the gap, and head north again.
The chest in this room contains 20 rupees. Unlock the door to the left, and you will have to fight against two Boos. They disappear when you try attacking them, but you may use magic powder on the torches to make them vulnerable. When they are defeated, you can collect the Power Bracelet from the chest.
With the bracelet, head right, and throw the pots out of the way and take the upper exit. Strike the crystal twice, advancing when possible, to reach the chest (If you can't, you will have to backtrack to a crystal, or take a staircase two rooms south). This reveals a small key, to which the door is only two more screen east.
Before taking the small key, head south instead (or use the staircases visible earlier). You should see a room with an imprisoned Pols Voice, a Keese, and a Shrouded Stalfos. You need to defeat them in the correct order to reveal a Nightmare Key, and this order was given by an owl statue earlier. You first have to reach the Pols Voice, by pushing one block down, and one to the side, and defeat it by throwing a jar at it. After this, defeat the Keese and then the Stalfos to reveal the nightmare key.
Next, head up, and to the right. In this room are two Pols Voices and a Zol. You can't harm the Pols Vocies with your sword, but you can throw the jars at them. When the monster is defeated, continue down the stairs to the underground section. stand on the first platform to lower it, but when you reach the second platform, you will need to pick up a jar first for the weight to push the platform downward. When you climb up, you should be in front of the nightmare door.
The trick to defeating this boss is to break the Genie's bottle, but you need to catch it first. To do so, you need to strike it with your sword. When the bottle stops jumping, pick it up using the Power Bracelet and throw it against a wall. Repeat this until the bottle breaks and releases the Genie. While the genie exits the bottle from time to time, you can't harm it or the bottle until it begins to charge at you once more.
When the bottle is broken, it will turn invisible, when it appears, be prepared to spin attack it before it can shoot fireballs at you (or failing that, dodge by moving downward before it reappears). If you can interrupt its attacks, you should have no problem defeating it before it can kill you.
When the Genie is defeated, head west and collect the Conch Horn. In the following scene, you receive a call to visit the Prairie. You may optionally return to the dungeon, and collect the first chest that contains 50 rupees.