I have been getting the same problem on version 4.1.2 (12.0.A.2.254) today and after reading this post I was almost ready to reset the phone but fortunately I did not have too anymore as either because what I did as below or it was just the case that the restarts were meant to be repeated for a while.
I anyway entered settings from the Keyboard icon symbol on the encryption password screen and I have disabled the Sim Card Pin Lock
It did not make any difference as phone kept going in a loop and so I turned the phone off, remove Micro SD Card (Just as a precaution as this does not get encrypted anyway) and switched phone back on, Voila....problem solved, I am back in the phone.
If I have understood correctly, the encryption process is meant to do this as to reboot the phone several time. Mine did it around 20-25 times but it seem to be normal as I was warned just before clicking on the encrypt button as a message appeared saying that phone will reboot several time until encryption process complete.
A good idea is to remove sim card lock before doing this as otherwise you will have to type both the sim and the phone PIN everytime the phone restarts.
I think this is not an issue is just the way is meant to be although yes is quiet time wasting as per all those restarts require you to atleast eneter the decryption PIN. I am sure there are third party encryption Apps doing a more stratightforward Job.
Just be patient and let the phone do the job and if after an hour or so (which is what apparently it should take) is still looping try and do what I did as at least turning the phone off and back on and see what happens.
Good luck
Max
