Steve,
The story is oft-repeated on cryptozoology sites, with little variation in language and detail. (Run a google search for "Soviet whaler, giant squid" and you'll see what I mean.) The event supposedly took place in 1965, and most versions hold that the squid's head was found in the whale's stomach, with the arms and tentacles "wrapped around the whale's throat." So, it sounds to me like a Soviet whaler waxed a sperm whale, the whale coughed up some appendages while floating in the water and imagination/vodka/crushing boredom supplied the rest of the story's elements.
Brennan, there's a fishy tale involving a monster squid in the Indian Ocean, attributed to one A.G. Starkey. Alone on deck (of course) aboard a WWII-era British Admiralty "trawler", he claims to have witnessed a beast on the surface that was longer than his ship. It's another crypto-site staple, and sounds totally unbelievable. For one thing, the size of Starkey's vessel keeps changing: some accounts put it at 60 ft, others at 175 ft. The vessel is described as a trawler, but the Admiralty wasn't in the fishing business during WWII, if ever. Finally, Mr. Starkey claims to have walked the length of the boat during the encounter, finding the squid's tail at one end of the boat and the tentacles at the other. Assuming, for the moment, that there really was a monster squid that helpfully positioned itself next to the nearest scale reference, to believe Mr. Starkey you'd have to accept the existence of a squid fully 100% larger than the largest known specimen of any species. It doesn't add up. Blame the poor quality of wartime rum, I say.
Cheers,
Clem