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"The movie is an allegory for divorce. The "monster" is actually the product of Adjani's internal guilt, shame and deep sexual desires that have been physically manifested into the external reality. The monster evolves into a replicate of her husband - her idealized husband. Adjani's own doppelganger appears in the form of her lookalike - the school teacher Helen, who is the idealized wife, in Sam Neill's eyes.
At the end, when the monster goes back to the house (After Adjani and Neill are killed) the boy begs Helen not to open the door and then promptly drowns himself in the bathtub - the "idealized" husband and wife are reuniting but the boy senses that it is a doomed marriage, as he already knows the troubles of his family life. That is the symbolic meaning behind the whole world ending at the film's end: they are a dysfunctional family unit destined to end destructively. Nothing in this film is literal. Like I said, it is an allegory.
The film was in part based on director Zulawski's own ruined marriage and the film on some level explores the devastating effects of divorce and the stress upon the children involved. It isn't really much of a "horror" film in the classic sense as it is a psychological drama."
Thanks to parafffin5 for explaining it. Edit (Coming Soon)