From 1UP's awesome interview.
Ah ha! But then....
1UP: In regards to the Japanese version of Ico, there is a scene after you've completed the game the second time, where Ico and Yorda are found on the beach scene eating watermelon. What the heck is that all about? And in the case of the ending of Ico, some people have said that finding Yorda on the beach or waking up on the beach is in fact the afterlife. I say that it's not, but the final words uttered by Yorda make me unsure of what to think in terms of the meaning of the ending. Can you clarify?
FU: About the watermelon - it's in just for fun. If you say "ocean," we say "watermelon." In Japan, the association of seaside and watermelon is very strong. And the animator came and said, I've made these watermelon-eating animations, so we said let's put them in! And we did. And then, the real climax is the final beach scene, seeing the sillhouette of Yorda; Some people wonder if it isn't a bit too much; but we embrace that too with Ico.
KK: Yes, if there is a meaning, then - what is the meaning?
Ueda: If there is a meaning, then it's Ico's dream. It's over, and it's really over at that point, but in the ship Ico is dreaming. He wishes he could see Yorda one more time. I guess that's the real meaning.
Ah ha! But then....
1UP: So Ico "sees" Yorda because she wishes to see him. Not because she escaped from the castle and magically reappeared on the beach.
Ueda: Yes, that's one possible interpretation.