I know you already have a Final Fantasy charecter, and it's VII as well, but I would personally love to see Nanaki (Red XIII) simply because he wouldn't have too much strength and his combat would rely on speed. You could use Cosmo Canyon (specifically the area where his father died, with it in the background).
Final Smash : A version of Howling Moon where he heals himself and any team mates fully, then dashes forward, seriously damaging and also stunning anyone he hits.
Also, how about someone from the Bloody Roar franchise? Like, Xion or ....I forgot the main characters name. He turned into a wolf? Stage : I liked the rooftop battle ground the most.
Final Smash: Transforming Combo. If you connected with the initial strike, you'd launch into a combo that ending with a transformation attack. You'd then play as the beast form until the next time you used the final smash.
Or, variation, you could just transform for a little bit, making your attacks devastatingly powerful and you not invincible, but unflinching and unlaunchable.
Joe Musashi from Shinobi 1-3. He's one of my favorite characters ever. You could use shuriken for low damage projectiles, and his sword and kicks for combos.
Stage : The hologram room from the final boss fight in SHinobi 3.
Final Smash : Either a ninjitsu (possibly his fire dragon one, it would just blast through the screen a few times with it being possible to dodge) or a "Power Block" with the same effect as my second Bloody Roar finisher suggestion.
Either the main charecter, the villain, or the creepy master martial artist from Shenmue. I loved that game so much. You couldn't really hate it completely, and if you did, you needed to swallow glass.
Stage : The main characters backyard, with the cherry tree viewable. You could bust through into the sparring room as well.
Final Smash : Depends on the charecter really, but just a one strike that instantly kills whoever it hits.
And.....either Rikimaru or Tatsumaru from Tenchu. You could use the grappling hook in combos. xD
Stage: The room where you fought Tatsumaru / whatever the creepy dude from the first games name was (I want to say Orochimaur xD) for the last time in Tenchu : Wrath of Heaven.
Or the top of Gohda castle.
Final Smash : Wrath of Heaven. With the same effects as the game. (including take 99% damage regardless if you hit or miss)
I'll leave you guys alone now.