Who coined the term "dago", what does it mean, and has it always been derogatory?

"The word 'dago' is a derivative of the Spanish name 'Diego', which means 'James'. It was originally coined in the 17th century by British sailors to indicate Spanish or Portuguese people, especially sailors. Despite the hispanic origin of the word, in the 19th century the word 'dago' became more commonly used in the USA as a derogatory term for Italians, due to the large immigration from that country. However, it is still used to indicate Spanish or Portuguese people as well, but rarely the French."

http://wiki.answers.com/Q/What_is_a_dago_or_a_wop

An offensive slur toward Italian's who migrated to the United States. Many worked and were paid as the "Day Goes" like modern day "day laborers". Many Italian Americans will not be offended if you know where and how this is derived.

In America, port cities were flooded with waves of different immigrant groups, most unable to speak English and unable to hold any but the most menial jobs because of it. But they all wanted to get ahead and learn enough English to become foreman instead of laborers or clerks instead of stockboys. In the case of Italian-Americans they arrived in the wake of a wave of Irish Catholics, who had fought their way through and worked their way into the better jobs the Italians now had their eyes on. To forestall this competition for their jobs the irish did what had been done to them - they made it dangerous for Italian Americans to go out in the evenings to the places where they would have the opportunity to interact with people and learn English and how to get ahead. They addressed Italians as "Day-Goers" mispronounced as "Dagos" both as a racial slur and a form of intimidation.

http://www.urbandictionary.com/define.php?term=dago

dago -- 1823, from Sp. Diego "James," orig. used of Sp. or Port. sailors on Eng. or Amer. ships, by 1900 it had broadened to include non-sailors and shifted to mean chiefly "Italian."

http://www.etymonline.com/index.php?search=dago&searchmode=none