Why does "it" have a dehumanizing connotation?

The fact that it is not used for humans is why its use on humans is dehumanizing. We don't refer to those odd-shaped things at the ends of your arms as "paws"; if I call them "paws" I am connoting "animal" instead of "human". The long history of it reinforces it. Also, we have pronouns for humans. So using a non-human pronoun for a human must imply something, right? Otherwise, why not just use the human pronoun?

The original choice of words may be arbitrary. The fact that the original speakers distinguished between humans and non-humans may be a relic of culture or random chance. But the centuries of usage reinforce the meanings. It is a feedback-loop. Children learn not to use the language a certain (arbitrary) way and that learning becomes entrenched. The connotations become a feature of the language because of continuous reinforcement. Then, when someone violates the convention, it draws attention to itself.

Old English was highly inflected and the third person singular personal pronoun had masculine, feminine and neuter forms. The neuter form was, in the nominative, hit, which became modern English it. English grammatical gender has disappeared, but we retain he and she to refer to nouns which clearly describe male and female entities, mostly people. The neuter it refers to everything else.

At some point people decided that humans should be referred to as "he" and "she" and inanimate objects as "it". I don't know exactly who made that decision and when, or if there is anyone who does. Whether some committee was convened to decide on proper pronoun usage (which I doubt), or whether it shook out over a period of time, is irrelevant. The decision was made. From that point on, referring to another human as "it" implied that you do not consider them a person.

This is not really "circular logic", but rather a matter of applying definitions. Like, why is this website called "english.stackexchange"? It's because someone made up that name. You could say it's circular logic in a sense, "It's called english.stackexchange because that's what it's called". But really, someone makes up a name, then that's what the thing is called. It's not that mysterious a process.

Okay, really I'm oversimplifying when discussing English pronouns. There were plenty of languages around before English was invented that had pronouns, and many (most? all?) of them had masculine, feminine, and neuter. This is an idea that has been around since the beginning of recorded history. The biggest difference between English and other languages is that only apply "he" or "she" to inanimate objects in very rare cases, while other languages attach gender to all sorts of things.

Since he and she are also available, the use of it implies "neither male or female".