In the lines "And give her to the god of storms / The lightning and the gale,” Oliver Wendell Holmes is expressing a desire for the ship to meet a grand and heroic end, rather than be subjected to the indignity of being destroyed or decommissioned. This suggests that the ship should sink at sea during a storm, fighting against nature itself, which would be a more noble end than being torn apart for scrap. Therefore, the correct interpretation is:
Let the ship sink at sea, rather than suffer humiliating demolition.