I have the book Irish Names by Ó Corráin/Maguire and it lists the name as follows:
Lugaid: Lughaidh, Lúí (lú-í)
so the old spelling, followed by the new spellings, followed by the pronunciation in brackets.

It does seem that in the midwest the the name was pronounced Lua, hence: Cill da Lua / Killaloe (Lua's church)

http://en.wikipedia.org/wiki/Mo_Lua_of_Killaloe

So I guess the authors of the book got a bit carried away with themselves with regards to Lúí. According to google there are a few souls however using this spelling...

So, it looks like you already have your answer. (I was just trying to confirm what you had without getting Lughaidh too stirred up. ;-) )

I wouldn't put a síneadh fada on the u in Lua, by the way - the ua diphthong is naturally lengthened by convention.