The issue here is simple - you have to defeat the beast which you have unintentionally summoned. Don't even try to hide and use any assassination skills, as your enemy is too smart for that. You don't however need to charge at him on your own - that's the role of the villagers who will attack anyway (just make sure Fanari Strong-Voice doesn't die, as she's needed in A new source of Stalhrim!). you can kill the beast using the bow or spells. However nothing stands in the way of a direct face to tentacle fight should you prefer it - however it's a less convenient solution.
After defeating the beast, approach the disenchanted obelisk to learn a new Word of Power - North Wind. Afterwards return to the Skaal Village and tell the old shaman what has happened.