Some of these ideas are fairly good. Let me see what I can put into it:

~Rooms changing locations in the dungeon. This could be more of an unusual dungeon feature than a sanity effect; part of the dungeon could be figuring out the pattern of changes and acting on it.
~Dungeon rooms dedicated to torture and featuring large volumes of horribly defiled and realistic-looking corpses, with intestines hanging out (which are used to attack Link by swinging them), genitals mutilated, and selected extremities chopped off to lend to an asymmetrical design ethic.
~Rather than having one piece of background music, have several that are played at different points in the dungeon. The main temple song could be some kind of tribal chant, or even real liturgical music. And this is just me, but I think it would have quite an effect on veteran gamers if one of the worse torture rooms featured a marimba-based remix of the Mario theme played along with the moaning and crying of the torture victims.
~In the first torture room Link comes to, he could walk in the door and see a live human being assailed by a Poe's invisible scythe, but be too late to stop her from getting hacked into sausage filler before his eyes. Following that, the corpse could simply disappear, leaving Link to wonder whether it was real or not; the same person could appear several times throughout the dungeon, each time being killed in a different and uniquely horrible way.
~At least one room in the dungeon should be the endpoint of a sewer system; as such, it would be entirely filled with human fecal matter.
~Somewhere in the dungeon, perhaps as a mini-boss battle, an enemy with a speaking part (possibly a Dead Hand or Poe) could taunt Link for being hopelessly inadequate to save everyone; to reinforce his point, the evil specter could display "visions of the future" on the far wall - footage and pictures of numerous real-world atrocities including the massacre of the Native Americans, the Holocaust, Soviet gulags, and recent events such as the Nick Berg beheading and the Abu Ghraib scandal.
~It's often noted humorously how Link never seems to get any, despite the fact that every female in Hyrule is pining for him; this could be subverted into a mechanism for horror by pointing out the mental effects of his apparent long-term sexual deprivation. An easy way to facilitate this comes in the form of the Like Like; it could be redone to mimic a vagina with rows of teeth and tentacles coming out of it (kind of like a Galgamek vagina, for those of you who get the reference); the fact that it eats Link's shield could serve to symbolize his psychological barriers being torn away.
-Link walks into a room and finds a zombie having sex with another zombie's knife-created stomach orifices.
~New enemy type: a miniature ReDead. This is not a zombie, but rather an aborted fetus which attempts to strangle Link with the umbilical cord as well as trying to eat his flesh.
~The boss monster could be a creature constructed from human corpses woven together by protruding organs.
~Some have suggested sanity effects a la Eternal Darkness. This could be a good idea, but the effects would have to be uniquely Zelda to have the same impact a second time around. Some possible sanity effects follow:

-Opening a treasure chest and finding a still-beating human heart in place of whatever item is supposed to be inside it (points if you get where this came from).
-Going through a door and having the screen fade out; when Link emerges on the other side, he's in the original NES Legend of Zelda game.
-Link suddenly keeling over and dying for no apparent reason, but instead of the normal "Continue" and "Quit" options, the Game Over screen would feature the options "What The" and "F***". If the player selects either option, they are brought back to life exactly where they were with only three hearts left; if they press nothing for seven seconds, Link is resurrected at full health. The ordeal does not register on the death counter, regardless.
-Link sees a ReDead, which rather than attacking inexplicably flees from him into another room, running with an odd gait the entire time. The assistant character warns Link that it's probably a trap; if the player chooses to give chase, they find a very long corridor, at the end of which the ReDead is even more inexplicably sitting on top of a Landmaster, which promptly blows Link to chili mac with several bombs and a face full of plasma. Following this, the obligatory flashback occurs; the player starts back up minus one heart.
-Link accidentally chops his arm off while drawing the sword, and bleeds to death in fairly short order.
-There would have to be some kind of sanity meter or equivalent in place to use these effects; if it drains completely, the next door Link opens could feature LSD-like visuals of a long, golden stairway leading up towards a light (five points for getting the reference). When he gets to the top, the camera would switch to first-person and allow the player to look around their new environment, which happens to consist of a padded cell in a mental hospital. When the camera switches back to third-person, Link is in a straight-jacket; he suddenly screams and falls over in a state of complete delirium. The camera switches back to first-person and Link faces the wall, with the shiny metal cell door barely in view allowing the player to see one of his newly-insane eyes reflected in it. The cloth on the part of the wall he's facing would spontaneously rip in such a way that the tearing forms the words "Game Over", but after sitting there for a few seconds, the HUD would become available again, albeit minus all of Link's items. A knife would be sitting on the floor near Link; the Action button would allow him to seize it, but the only action available would be "Suicide"; pressing the Action button again would make Link slit his own throat and return to the title screen. The faint sound of wind would form the only background noise; if Link looks around for it, he will find a grate and a new action command "Remove Grate" which can be used to take off the screws holding the grate to the wall. The duct uncovered by doing this would take the player back to where they left off in the main game.

...no, I didn't have a fun childhood, thanks for asking.