You can hear the song here:
http://www.youtube.com/watch_popup?v=nFg2qKkg...Starts at about 2:50.
The song is about a "little Dutch girl in Sheboygen" who speaks English perfectly in school, but who misspeaks when she gets excited at the dance. Sheboygen is in Wisconsin where there are many Germans, so the writer of the song may have meant "Dutch" in the same sense that "Pennsylvania Dutch" are 'Dutch'.
I believe she is trying to say, "I get hot easily, so do not hold me so tightly when we dance. Do not hold my arms out too far, it is better for spinning." In the song they are playing waltzes at the dance, and she wants to be able to spin.
What the lyrics say is, "I warm so easy, so Dance Me Loose . . . Don't hold my arm so extra out, Extra out, extra out, Don't hold my arm so extra out, It makes so good to spoon."
I guess the 'humor' or intended humor of the song is that in her innocent mis-speaking she is making mildly sexual comments - she warms easily could be mistaken for she gets warmed up easily - dance me loose could be mistaken for dance until she is loose (as in morally loose) - it makes so good to spoon could be mistaken for an invitation to cuddle.
Of course, the song is a novelty song that doesn't make too much sense, so even the five minutes I've devoted to 'analyzing' the song is probably five more minutes than the writer and the performer gave to analyzing the song.