I just received a third guess about the origin of loo from Chris Stewart, an old e-friend in South Africa. Here is what he proposes:
I am surprised to find that this word first came to print in 1932. I do not know where I came across the following conjecture (or, if you prefer, urban legend), but it was probably my (British) dad.
The Brits & the French have an inextricably entwined history, and the language shows it. The Brits also like to make fun of things, especially the distasteful—and particularly love to parody the airs & graces of the high & mighty.
They thus have a habit of adopting French phrases and (mis)applying them, deliberately or not. In an earlier time (though for all I know, it still happens), when the joys of waterborne sewage were virtually nonexistent, one of the first tasks of the day was to get rid of the “night soil” from the chamberpot under the bed.
One expedient was to simply throw it out of the window. Where land is scarce and thus expensive, it is normal to build up, instead of out. In Europe & England, the result is multi-story dwellings; bedrooms tend not to be on the ground floor. And often in the city there is no front yard; the building is right on the street front.
To spare innocent passers-by the noisome prospects of being showered by night soil disposal, one would call out a warning. One such would be ironic use of the French, Garde de l’eau! “Look out for the water!” The phrase drifted in time from the original high court pronunciation to the common vernacular “gardyloo“.
Once flush toilets became the norm, the loo part persisted by association without the need to retain the warning part.
This all makes sense to me—even if it is a crock of, um, night soil.