One of the possible origins comes from the French. When tossing the contents of the chamber pot out of the window, they would call "guarde l'eau".

There are several theories about the origin of this common term for a familiar article of sanitary furniture. The first, and most popular, is that it is derived from the cry of 'gardyloo' (from the French regardez l'eau 'watch out for the water') which was shouted by medieval servants as they emptied the chamber-pots out of the upstair windows into the street. This is historically problematic, since by the time the term 'loo' is recorded, the expression 'gardyloo' was long obsolete. A second theory is that the word derives from a polite use of the French term le lieu ('the place') as a euphemism. Unfortunately, documentary evidence to support this idea is lacking. A third theory, favoured by many, refers to the trade name 'Waterloo', which appeared prominently displayed on the iron cisterns in many British outhouses during the early 20th century. This is more credible in terms of dates, but corroborating evidence is still frustratingly hard to find. Various other picturesque theories also circulate, involving references to doors numbered '00' or people called 'Looe'. ...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. http://www.askoxford.com/asktheexperts/faq/aboutwordorigins/loo?view=uk 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. http://www.yaelf.com/aueFAQ/mifloo.shtml

All lunatics are assumed having com from moon associated with loon...

Another answer I encountered is: loo 1 (l) n. pl. loos A card game in which each player contributes stakes to a pool. -------------------------------------------------------------------------------- [Short for obsolete lanterloo, from French lanturlu, a meaningless refrain, loo.] The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000

French term le lieu ('the place')