I thought of H.P. Lovecraft, too!
Paul begs Ezequiel to help him escape. Ezequiel relents and takes Paul to the Mayor's manor, so he can steal the town's only car. Ezequiel distracts some Imbocans long enough for Paul to slip inside, but he accidentally honks the horn while trying to hot-wire the engine. Forced to flee into the manor, Paul finds a beautiful woman named Uxia, who looks just like the mermaid in his dreams. She saves him from discovery, but when he finds she isn't human either he flees in horror, despite her pleas to stay.
Here's the movie trailer, with a brief glimpse of tentacles: