In response to this question which appeared in Cecil’s mailbag, I think there is more to the answer. Canadian author Farley Mowat wondered the same things about wolves in his book, “Never Cry Wolf”. He did some experiments himself, and he concluded that the circling was to help circulation, reasoning that the movement just before rest or sleep would enable the animal to get up and go quickly if it needed to. While I don’t dispute the bed-making theory, I think that Farley was onto something. Mind you, he also wondered how arctic wolves survived on mice, so he again did some experiments. He included his favorite mouse soup recipe in the book.
The mailbag item being referenced is Why do dogs circle before lying down? (16-Jun-1999)
What kind of experiments did Farley Mowat do?
He did it himself. He did a bunch of trials, varying the amount of times he turned around.
He found that when he did this spinning thing his limbs were not as stiff, he was less groggy when waking up, etc.