i'm no pro, but here's some advice
yes, this definitly has a lot of potential. Sprite are great and fluids, attacks are... well they attack.
here's some suggestion (some are harder to do than the others)
1, Character get "stunned" or falls back when hit. (Opens the way to combos)
2, combos, instead of pressing and holding the attack button, make it a "mash" thing. dunno if that's clear enough.... It feels like an autofire, make it manual fire =)
3, add some characters! (dunno if you planned to add more, bt it'd be great. like, secret chars after story mode or something.
4, The SFX can be found easily. if they get it for Warcraft 3 maps, you should be able to find it. Try the "HIVE" forum. They specialise in wc3 maps but you might be able to find the SFX there (or some hint at least)
5, when the attack doesn't connect (doesn't hit at all) make it impossible to chain the rest of the combo. That, or make 2-3 attack buttons with different type of attack.
6, try to add some "limitation" to the jutsu (Rasengan and Chidori) so we can't do it anytime we want. Like, a Chakra meteror something. Maybe a button combination too? Like up-left-down-right-H-H-H.
7, Special background effect when "high level Jutsu" are used. Like "Katon, Gokyaku no jutsu - the fireball - and some other stuff. Why not som picture on the background? Maybe the Character's face on one of the corner of the screen.
Personnal request would be to add Konohamaru to the character. I remember playing as Konohamaru on one of the PS2 games, instead of Kunai or star, he throws rocks and stuff. pretty funny.
Also, you could add some humor, funny line the character said or random funny/stunned/shocked face for the loser. Naruto is an expressive anime so i don't think you'll need to search very far to get some nifty face expressions.
You could let the player choose his character (especially if you use AI and stuff)
That's about it i think. If i ever get more ideas or suggestions, i'll let you know.
Good Luck!