Means "I don't know" or similar
It seems that an Englishman, in Australia
during the days of colonizing, saw this creature hopping
about and wondered what it was. At first opportunity he
asked an Australian bushman, who answered "kan-ga-roo,"
meaning "I don't know."
Letter in New York Times, February 19, 1942
The hilarious etymology certainly makes a lovely story, as well as a good piece of advice against na´ve anthropology, but it isn't true. (I've heard it about other things australian, haven't researched them though.)
The word was introduced in the English language by Joseph Banks, an English botanist and science patron in general, on Cook's first voyage. At one time, he wrote about quadrupeds, and noted that "the largest was calld by the natives Kangooroo". This is what the grey kangaroo is actually called in the aboriginal language Guugu Yimidhirr.
It is different from any European and indeed any animal I have heard or read of except the Gerbua of Egypt, which is not larger than a rat when this is as large as a midling Lamb; the largest we shot weighd 84 lb. It may however be easily known from all other animals by the singular property of running or rather hopping upon only its hinder legs carrying its fore bent close to its breast; in this manner however it hops so fast that in the rocky bad ground where it is commonly found it easily beat my grey hound, who tho he was fairly started at several killd only one and that quite a young one. Another was calld by the natives Je-Quoll: it is about the size and something like a polecat, of a light brown spotted with white on the back and white under the belly. The third was of the Opossum kind and much resembling that calld by De Buffon Phalanger. Of these two last I took only one individual of each.
("Je-Quoll", by the way, is the Guugu Yimidhirr word dhigul, which is the marsupial genus Dasyurus. In English it's called "native cat", or "quoll", just as Banks wrote it.)