(Warning: I guess you could say there are spoilers following.)
This whole movie was an anti-allergorical, archtypal Hero's Quest, with tremendous mytho-poetical resonances between our world and Myth. The Hero (Mac) is sent by his king (his nutso boss Happer) to win a tremendous prize (the village.)
In attempting to accomplish this quest, the Hero gains two Companions (Danny and the rabbit.) The Hero and the Companions travel to a distant land, where the Faerie (the villagers) take them "under the hill" and attempt to seduce them. Both the Companions are lost to the Hero (Danny falls in love with the mermaid and effectively joins the other side; the rabbit loses its life, and in a nod to Atreus and Thyestes the rabbit is fed to the Hero.)
The Hero and his Companions are lost in the mists, and must bide their time until they can find their way free. As I recall, there's some amount of self-discovery that happens here.
Meanwhile, the carnal leader of the Faerie (Gordon, the pub-keeper who is sort of a Dionysian/Pan analog) and the spiritual leader of the Faerie (Rev. Macpherson) are working together to lead the Faerie in conquest of the Hero. The wife of the carnal leader, Stella, appears to be quietly trying to seduce, or perhaps just distract, the Hero as he's trying to accomplish his quest.
Eventually, it comes out that the Key to the Hero's quest lies in besting the King Under the Mountain (of beach trash.) After repeated assaults against the King's castle, the Hero must call in his own King -- but only after viewing astronomical omens. In a fit of Deus Ex Machina (or at least a helicopter) the Hero's King arrives to do battle with the King Under the Mountain.
After the battle, and the subsequent betrayal by the Hero's former Companion, the Hero returns home. However, he has found that the Faerie have claimed a piece of his soul, and he will nevermore know peace in his own land.
This analysis was an off-the-cuff blethering, and I'm sure it is incomplete. Other things that should have been addressed were the baby without a father, a ceilidh, the girl who was ever after the Hero, and the faceless Rider.
(Originally posted to the Tamson House
mailing list.)