Happens on XL2003
You get the same results with
=LOOKUP(3,{1,2,3},A1)
=LOOKUP(3,{1,2,3},A1:A2)
It looks like third argument, A1, determines the starting point,
the default direction being to the right.
When addittional cells are given, it unambiguates the direction.
The whole range does not have to be specified.
In the first case, the third item after A1 towards the right is C1.
In the second case, the third item after A1 in the down direction is A3