Hi Doobee,
At last, I've found someone with the same problem I had! I'm on O2 and thought great, an upgrade, got 2.3.5 then every time I tried to turn on Bluetooth it did just as you described, a continuing cycle of partial rebooting until I could sneak into settings and turn off Bluetooth, I also found that the battery life suddenly became appalling! I eventually spoke to an O2 'Guru' and he suggested that after any upgrade it's a good idea to do a full reset. To his credit he was absolutely right, after the big reset and re-entering all my passwords and settings etc it works perfectly AND the battery life is much better than it was on 2.3.3!
Only downside was that it took a fair bit of fiddling to get Kies to backup everything for me, that said the backup worked and when I restored all my data after the reset all my SMS's, Memos, Contacts and stuff were exactly as they were before.
The latest version of Kies appears to have changed a bit as I seem to remember that there was a group of three options under Media and when these were checked the backup always crashed. All I did was manually copy the Media files (pictures in DCIM, music and downloads I think) all these are on the phones internal memory as I'd already unmounted and removed the external SD card.
I also took screenshots of my three homescreens and four app screens before I finished as a reminder of how It was setup (transfered these to my PC obviously)
Andrew