The title Katamari Damacy is a transliteration of "Katamari Tamashii" (塊魂). "Katamari" is japanese for "lump/clump" or a "mass", and "Tamashii" is "soul/spirit", which roughly translates the game's title as "clump of souls", in a context of "team spirit." The two kanji-letters also look similar, using similar right-side letters (akin to 鬼).
When asked about the title, Keita Takahashi (director and producer for the first game and following sequels) said in an interview with Dengeki Online "It just popped into my head suddenly, and this is what it has been from the beginning."