Let's take this in two parts.
Firstly, with three switches in a ring, STP will work as you described.
Secondly, your question about plugging a switch into itself depends rather on the switch or, more specifically, the way STP has been implemented on the switch. As you suggest, basic STP would tend to come undone as by definition all ports on the root bridge are in the forwarding state. At the very least it would force an election for a new root bridge but I'm not sure how it would resolve. With some simpler switches I think STP would fail and you'd get a broadcast storm. However with decent switches such as Cisco the switch is more sophisiticated and would detect the loop and block or disable one or possibly both ports.
I've never actually tried this - has anyone done it and can tell us what happens?
TheBishop, you are correct. It does depend on the switch. A Cisco, even with a default STP config, will detect and block the loop. An unmanaged switch will loop up and start causing problems.
I had a user at my old job who was going on vacation but taking her laptop. She plugged her ethernet cable into the spare port in her office so she wouldn't 'lose' it. Every broadcast multiplied by 2 on those ports and after about 10 minutes, would cause the switch to become unresponsive. It was a hassle to troubleshoot because the router itself was responsive from the outside (they were in LA, I was in Chicago), but the ethernet would drop when the switch died. While the ethernet was alive, the counters were going crazy. Once I figured out the issue and had them unloop the cable, everything sprang back to life, but that user (who was actually quite a b&%tch during the whole ordeal because she claimed it was my fault) got a big piece of my mind for a good 20 minutes afterwards.
