In British English a fruit or fruitcake is someone who is crazy, supposedly in use in both the UK and America from around 1910 from the expression 'nutty as a fruitcake' (with 'nuts' also being another word for crazy). I imagine fruit loop also derives partly from the word 'loopy' also meaning crazy. A fruit can also be a disparaging word for a homosexual (especially an effeminate gay person), possibly, some say, because fruit is soft and tender, while others say it is one of many words that used to refer to prostitutes that later became applied to gay men. It's likely that the crossover between the use of the word for crazy and homosexual is because until just a few decades ago, homosexual people were considered to have a mental problem. Fruit loops as a cereal has been around in the US since the 1960s, and it is likely the name has been appropriated by the gay community. Fruit loop is some times used in the gay community to refer to the gay bar areas, or as a name for coloured solidarity bracelets. This is something that would probably make Dr Kellog spin in his grave, seeing as he was an advocate of sexual abstinence and invented cornflakes in the hope of preventing masturbation (he even advocated genital mutilation of children, so maybe stop buying Fruit Loops cereal).

American here. Sinewaves' answer is great, I disagree the definition has anything to do with sugar or toucans. To summarize, 'fruit' and 'nut 'have been used as disparaging words for mentally ill or crazy-acting people. Subsequently, creative people have extended fruitcake, nut job, nut case. Fruitloops is a brand name of a fairly new cereal product. I believe it is rarely used in conversation here. I didn't know about the gay synonyms, but there are lots at urbandictionary dot com, a good reference for the latest slang.

I think it's more crazy than stupid... I guess the reason may also have something to do with the amount of sugar in them. From memory, they are close to 50% sugar. People on 'sugar rushes' can be pretty crazy sometimes...

It's not used very often, so I wouldn't worry about it. Froot Loops are a type of cereal, and its mascot (Toucan Sam) does stupid and crazy things: https://www.youtube.com/watch?v=KhbN8OouCUU The cereal is also rainbow-colored. Rainbows are associated with the gay movement, and gays are stereotyped for being wild, crazy, and flamboyant.

In America "Fruit Loops" is a breakfast cereal. Very naughty but delicious!