The alt.usage.english FAQ   

• "loo"

  (Word Origins)
  
  This British colloquial word for "toilet" was established usage by the 1920s. Suggested origins include:
  
  
  • French _lieu d'aisance_ = "place of easement"
  • French _On est prie de laisser ce lieu aussi propre qu'on le trouve_ = "Please leave this place as clean as you find it"
  • French _Gardez l'eau!_ = "Mind the water!" (supposedly said in the days before modern plumbing, when emptying chamber pots from upper-storey windows. According to Chris Malcolm (cam@aifh.ed.ac.uk), this phrase is still sometimes used by common folk in Edinburgh when heaving water or slops, and tour guides say that it originated there circa 1600.)
  • "louvre" (from the use of slatted screens for a makeshift lavatory)
  • "bordalou" (an 18th-century ladies' travelling convenience)
  • "looward" or "leeward" (the sheltered side of a boat)
  • "lee", a shepherd's shelter made of hurdles
  • "lieu", as in "time off in lieu", i.e., in place of work done
  • "lavatory", spoken mincingly
  • "Lady Louisa Anson" (a 19th-century English noblewoman whose sons took her name-card from her bedroom door and put it on the guest lavatory)
  • a misreading of room number "100" (supposedly a common European toilet location)
  • a "water closet"/"Waterloo" joke. (James Joyce's _Ulysses_ (1922) contains the following text: "O yes, _mon loup_. How much cost? Waterloo. water closet.")
  
  
  Source: [Mark Israel, 'Word Origins: "loo"', The alt.usage.english FAQ file,(line 3754), (29 Sept 1997)]
  
  
  
  

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• ...There are many theories about this word, but few firm facts, and its origin is one of the more celebrated puzzles in word history. The one thing everybody agrees on is that it's French in origin, or at least a corruption of a French phrase. But which phase, etymologists are still arguing about. But we're fairly sure it's modern, with its origin having been traced back no further than James Joyce's Ulysses in 1922.
  
  So that seems to dismiss entirely the theory that it comes from the habit of the more caring British housewives, in the days before plumbing, of warning passers-by on the street below with the cry "Gardy loo!" before throwing the contents of their chamber pots out of upstairs windows. (It's said to be a corrupted form of the French gardez l'eau! or "watch out for the water!".) And equally the late date refutes the idea that it comes from the French bordalou, a portable commode carried by eighteenth century ladies in their muffs (you will never again be able to look at a picture of a lady wearing a muff without thinking what she's carrying inside it). It is also said that it's a British mispronunciation of the French le lieu, "the place", a euphemism.
  
  Another theory, a rather more plausible one, has it that it comes from the French lieux d'aisances, literally "places of ease" (the French term is usually plural), once also an English euphemism, which could have been picked up by British servicemen in World War One. But James Joyce may equally well have derived the expression as a punning reference to the battle of Waterloo, from the sequence: water closet--waterloo--loo. Or it may be that several linguistic forces converged to create the new word.
  
  Source: "Rambler III" The aue Archives (Deja), citing from the World Wide Words site.

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