Go to one player, single fight. Select Sub Zero as your character (and any opponent). Win the two rounds needed to get the "finish him/her" prompt. Then walk right up the opponent and press the following: Left, Right, Down, Left, B (from the left side)
If you are on the right side when performing the fatility, you will need to invert the left/right commands (so it would be Right, Left, Down, Right, B).
The difficulty doesn't matter (so you can pick the easiest) - or if you have a second controller, you can unlock this in two player.