It refers to a no-win/no-lose situation. It does not require three participants; two is enough.
There's a 19th Century story in Mexico that illustrates the Mexican Standoff very well. Two horse carriages going in the opposite direction entered a narrow street and met halfway through. Neither could move forward, and each insisted that the other back his horse carriage up. Each sent servants for foor and water, and both stayed firm for several days, until the authorities made both of them back up.
by Robert H94121 August 31, 2007
This is when you go into a public restroom, into a stall and another person comes in and sits in the stall next to you. Neither of you drop a deuce, waiting for the other to drop first. It makes for a sometimes tense situation
Damn... I was just in the men's room and got caught in a mexican standoff. I finally got up and left. I'm going to give it another try in a few minutes.
by Capt. Crapper November 28, 2009
A situation in which multiple (3+) gun weilding people are all pointing their shit at each other. They hold out to shoot until someone fucks it up and everybody dies.
The snitch in Reservoir Dogs must have been like "man im fuckin up theres a mother fuckin mexican standoff going down in this mother fucker. fuck.'
by speede September 21, 2006