Servicio vs. baño
When I started studying Spanish, three books told me that "servicio" means "rest room." When my wife and I retired to the Gringo Zone in Mexico (near Lake Chapala) nobody knew what I was talking about. They use the word "baño."
And two of the books clearly state that they are teaching Mexican Spanish, not Castilian (Spain) Spanish. How could these books have been so wrong?
9 Answers
Servicio is a common word used in Spain, baño is a common word for bathroom. Neither is wrong. It is the same as in English. Which is the correct word?
toilet?
bathroom?
WC?
ladies room?
mens room?
john?
loo?
rest room?
Castilian Spanish (castellano) is spoken in Mexico, with only minor differences between Castilian Spanish as spoken in Spain. And remember that in Spain, there are five Spanish languages, with Castilian the most widely spoken. More importantly, as echoline points out, there are different words for bathroom in whatever language. In some English-speaking countries, people would be confused if you asked to use a rest room. It doesn't mean American English is radically different.
Hey, thanks for all the answers. I am using a Spanish keyboard with an American version of Windows XP, and have gotten used to typing words like "banyo" and "senyor" phonetically. I forgot about the Spanish letters at the bottom of these pages.
However, you did answer my question. One of my Spanish book uses "servicio" for the rest room in an airport, and the other doesn't say. It appears that "baño" refers to a small bathroom in a house, while "servicio" refers to a large rest room in a public place.
Hola Vince,
¡Bienvenido al Span¡shD!ct amigo!
The word you're hearing is actually spelled, "baño" instead of "banyo". This word is the more generally understood, and more common term for restroom/bathroom (from my experience). Funny enough, your situation seems to be vise versa with me, I've never heard the word "servicio" used in the terms of restroom. 
Hope that helps,
DJ Huero ((( d(-_-)b )))
Here in Ecuador:
Restrooms with more than one stall are usually called servicios higiénicos and are labelled SS.HH.
A small room with a toilet and a sink or a bathroom in a house is usually called a baño.
I have used the word baño in several different regions of Spain (from Barcelona in the North to Torrevieja and Campo Amor in the south) and have never encountered a puzzled expression or raised eyebrow in over twenty years.
I have noticed that in larger public areas like railway stations and airports that los servicios is often the phrase used. Infact I have used that phrase myself on occasions.
I personally favour the words el baño for toilet as it is very specific whereas my Oxford Spanish dictionary lists over 10 different compound phrases using the term servicios each with a different meaning.eg: los servicios sociales = social services
In England we never use the American phrase rest-room to refer to a toilet. The idea of a rest room suggests a waiting room in a railway station or a doctor's surgery or soemwhere you might lie down if you were tired like, for example, a bedroom or a comfy chair in a livingroom.A public toilet certianly doesn't suggest a restful place with people coming and going.lol
I hope that helps 
I've heard 5 more at least!
Los aseos
El inodoro
El escusado (and I think I also heard La escusada said by a woman?)
El Váter
El lavabo
Just like in English, there are many ways to say it.
I've edited, because after listening to a Spanish podcast I now understand that 'escusado' is the correct word, it comes from the Latin meaning 'hidden away' or something like that - not anything to do with 'excusing'!
In Rocket Spanish they say to use baño publico for a public restroom and they do say that servicios higiénicos (SS.HH.) is used in some places.
´´Baño´´ seems the most common usage here in northern México.
