Bluetooth is a promising new wireless technology that enables portable devices to form short-range wireless ad hoc networks. In this paper, we present a new, distributed Bluetooth scatternet formation algorithm, called loop scatternet formation, which forms scatternets with slave/slave bridges only. In addition to meeting the criteria of maintaining connectivity, minimizing the number of piconets and the maximum degree of devices, the proposed algorithm formalizes the notion of network diameter and node contention. The loop scatternet thus formed incurs a much smaller network diameter and the number of node pairs for which a device has to serve, as a relay node is significantly smaller than that in the other types of scatternets. To validate the design, we derive the bounds of the number of piconets, the network diameter, and the maximum node contention. We also conduct ns-2 simulation to evaluate the performance of loop scatternets. Both analytical and simulation results validate the desirable features of loop scatternets.