Never played this game before. Would like a decent challenge, but nothing excessive. Should I go with medium or hard?

I would agree. Even on hard the game is incredibly easy combat-wise, except the final battle. The first time I played it I almost completely forgot about using Mystech (which you get later in the game), except in those places where I had to use it.

Strangely enough, the very first actual battle could get you killed since you have very little health so one wrong move and you're a goner. It's actually an easy fight, just it's also easy to lose.

Also one other battle against a crazy-strong foe (IMO this can be more difficult), but that fight is entirely optional.