From Wikipedia:
Kraken is a supposed type of sea monster of gargantuan size, said to have been seen off the coast of Norway and Iceland. An extensive description comes from Erik Pontopiddan, bishop of Bergen, in his "Natural History of Norway" (Copenhagen, 1752–3).
Kraken is the definite article form of krake, a word designating an unhealthy animal, or something 'twisted' (cognate with the English crook and crank). Kraken's sheer size and fearsome appearance have made it a fairly common seafaring monster in various fictional works (see Kraken in popular culture).
History
The name Kraken never appears in the Norse sagas. However, there is a similar sea monster the hafgufa described in Örvar-Odds saga and the Speculum Regale/Konungs skuggsjá. Carl von Linné also included Kraken as a cephalopod in his overview of the species, "Systema Naturae" (1735), with the scientific name Microcosmus, but in later editions he excluded the animal.
Early accounts, including Pontopiddan's, describe kraken as animals "the size of a floating island," and the real danger for sailors was not the creature itself, but the whirlpool it creates after quickly descending back into the ocean. Pontopiddan described the destructive potential of the giant beast: "It is said that if it grabbed the largest warship, it could manage to pull it down to the bottom of the ocean" (Sjögren, 1980). Kraken were always distinct from sea serpents, also common in Scandinavian lore (Jörmungandr for instance). A representative early description is given by the Swede Jacob Wallenberg in his book Min son på galejan ("My son on the galley") from 1781:
… Kraken, also called the Crab-fish, which [according to the pilots of Norway] is not that huge, for heads and tails counted, he is no larger than our Öland is wide [i.e. less than 16 km] ... He stays at the sea floor, constantly surrounded by innumerable small fishes, who serve as his food and are fed by him in return: for his meal, if I remember correctly what E. Pontoppidan writes, lasts no longer than three months, and another three are then needed to digest it. His excrements nurture in the following an army of lesser fish, and for this reason, fishermen plumb after his resting place ... Gradually, Kraken ascends to the surface, and when he is at ten to twelve fathoms, the boats had better move out of his vicinity, as he will shortly thereafter burst up, like a floating island, spurting water from his dreadful nostrils and making ring waves around him, which can reach many miles. Could one doubt that this is the Leviathan of Job?
According to Pontopiddan, Norwegian fishermen often took the risk of trying to fish over Kraken, since the catch was so good. If a fisherman had an unusually good catch, they used to say to each other: "You must have fished on Kraken". Pontopiddan also claimed that the monster was sometimes confused for an island, and that some maps included islands that only sometimes were visible, making Pontopiddan to conclude that the islands in reality were Kraken. Pontopiddan also proposed that a young specimen of the monster once died and was washed ashore at Alstahaug (Bengt Sjögren, 1980).
Since the late 18th century, Kraken have been depicted in a number of ways, primarily as a large octopus-like creature, and it has often been alleged that Pontoppidan's Kraken might have been based on sailors' observations of the giant squid. The earliest descriptions of the creature were more crab- than octopus-like, however, and generally possess traits that are associated with large whales rather than with giant squids. Some traits of kraken resemble undersea volcanic activity occurring in the Iceland region, including bubbles of water, sudden, dangerous currents and appearance of new islets.
In 1802, however, the French malacologist Pierre Denys de Montfort in Historie Naturalle Générale et Particulière des Mollusques, an encyclopedic description of mollusks, recognized the existence of two kinds of giant octopus. One being the kraken octopus, which Denys de Montfort believed had been described not only by Norwegian sailors and American whalers, but also by ancient writers such as Pliny the Elder. The second one being the much larger colossal octopus (the one actually depicted by the image) which reportedly attacked a sailing vessel from Saint-Malo off the coast of Angola.
Montfort later dared more sensational claims. He proposed that ten British warships that had mysteriously disappeared one night in 1782 must have been attacked and sunk by giant octopii. Unfortunately for Montfort, the British knew what had happened to the ships, resulting in a disgraceful revelation for Montfort. Denys de Montfort´s career never recovered and he died starving and poor in Paris around 1820 (Sjögren, 1980). In defence of Denys de Montfort, it should be noted that many of his sources for the "kraken octopus" probably described the very real giant squid, proved to exist in 1857.