Simulate a faulty block device with read errors?

It's not a loopback device you're looking for, but rather device-mapper.

Use dmsetup to create a device backed by the "error" target. It will show up in /dev/mapper/<name>.

Page 7 of the Device mapper presentation (PDF) has exactly what you're looking for:

dmsetup create bad_disk << EOF
  0 8       linear /dev/sdb1 0
  8 1       error
  9 204791 linear /dev/sdb1 9
EOF

Or leave out the sdb1 parts to and put the "error" target as the device for blocks 0 - 8 (instead of sdb1) to make a pure error disk.

See also The Device Mapper appendix from "RHEL 5 Logical Volume Manager Administration".

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There's also a flakey target - a combo of linear and error that sometimes succeeds. Also a delay to introduce intentional delays for testing.

It seems like Linux's built-in fault injection capabilities would be a good idea to use.

Blog: http://blog.wpkg.org/2007/11/08/using-fault-injection/
Reference: https://www.kernel.org/doc/Documentation/fault-injection/fault-injection.txt