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I've downloaded a file to my computer from Dropbox and am now suffering a zip/cpgz cycle! Instead of unzipping the downloaded zip file, my iMac converts it into a cpgz file and when I click to open/unzip with Archive Utility it creates a new zip file.. and so on.

This did not happen doing the same thing with my MacbookPro.

Does anyone know how to break the cycle?

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I have the same problem when trying to unzip zip files that were epub files. I use a program called iPackr, which is free through the App Store. The Unarchiver also works. I was never able to find a solution using the native Archive utility.

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First does this happen with all zip files or just this one?

If it is just this one you might try using an alternative free zip expanding utility (For Example Stuffit Expander) http://www.smithmicrosoftware.com/stuffit-expander.html

Sometimes renaming the ext from cpgz to .zip helps.

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This problem is addressed here: Open zip cpgz file - osxdaily. This is what it says:
You can either unzip from the command line:

$ unzip <drag the file here>

Or download using a different browser, or use the unarchiver.

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