The Smallest Room
Whenever the word 'loo' appears in a crossword grid, the sensitive clue setter is soon considering euphemisms, or outright evasion. I'm sure we would not so often evoke the old-fashioned card game were it not so.
So we have clues like, 'The smallest room (3)' or 'The Ladies (3)'. Not the American solution, 'the bathroom': that's too ambiguous for English-English ears. (Speaking of euphemisms, did you hear about the irascible Kingsley Amis's alleged reply to a solicitous hostess? He is said to have declared, 'No, I should not like to wash my hands, thank you. I washed them behind a bush on the way here.')
Our lexicographers aren't sure how 'loo' derives. It may recall the medieval warning, 'Gardy loo' or 'Look out below', when a bucket of dirty water was about to be emptied from an upstairs window. It may have some sort of punning association with Waterloo. Or it may be a corrupt pronunciation of the French l'eau.