V1.2 is a very old ROM and not very good. This isn't a setting issue, I think re-flashing the board will fix this. Any of the V1.6 ROMs fly well on the kk2.0
you'll need a USBASP programmer with a 6 pin adapter(easy to buy with the USBASP, or easy to build if you have the tools). This is a pretty standard electronics hacking tool, so you don't need to buy HK's version. once you've got it and installed on your PC, Google "LazyZero" and the kkmulticopter flash tool should pop up to the top. plenty of instructions on the site, but if you need some help feel free to ask.
This can be a tuning issue or a learning issue. I don't know your level of experience so please forgive me if you are not a newbie.
One of the most challenging things I had to learn as a newbie was to not move the throttle when I use the rudder. At first I changed the expos so that I had more expo on the throttle but that gave me soft throttle response when I wanted to lift off or correct a mistake. It was something that I just had to learn over time.
There are other reasons this could be happening but I will need to know more about your build.
What motors/rotors/battery are you using?
What does your copter weigh?
When you use rudder, the FCB should increase the speed of the tail motor to offset the loss of thrust that happens when the motor tilts. If the motor is already at its limit and cannot give any more speed, the copter will lose altitude.
If you are using a KK2 of any kind with the stock firmware, I will suggest you flash to something newer and better. Version 1.2 blows.