Come on, Leeneia, be fair - I just gave a reference by a native speaker grown up in the country the fairy tale is reported to come from. And that is a stronger evidence than guesses.
A well, pool, or even a kettle containing water often stands for the place of birth and rebirth (esp. in Celtic mythology); and like the fox is transformed into a human beeing and not into a mermaid, so the lad must not be necessarily change into a slug or another slimy water animal.
Rereading the story again as you proposed, I found:
The youth had to dip himself in the water also, and was changed into a small sea-hare. The merchant went into the town, and showed the pretty little animal, and many persons gathered together to see it.
Beg your pardon, but what do you think is so pretty about a slug that the people gather together to see it?

Wilfried