After you get the Nightmares key in Botto Grotto, you have to go to the Genie. To defeat the Genie you have to do this:

The Genie has two phases. In phase one, the genie will start juggling a bunch of fireballs. This is your cue to get in the lower right hand corner. When he starts to throw them, run to the left across the room. By the time you get to the left side, he'll have thrown three. Move back right now. If you don't hesitate the fireballs won't touch you. Now, he'll retreat back to his bottle. Hit it with your sword to immobilize it. Now, pick it up with the power bracelet. Throw it at the wall. Then, the genie will start over with his fireballs. Repeat this process three times. Then the genie will be hopping mad! Time for phase two. Now the genie will start to produce images of himself that start centering in on the middle of the screen. Equip yourself with the Sword and Roc's Feather. Stand right below the Genie. When the Genie becomes totally solid, jump and swing your sword. You'll jump over the fireball and damage him. Repeat this several times to put an end to the Genie.