The problem with testing algorithms is that it in no way tests intelligence. I would think that 9 out of 10 programmers that know an algorithm would not be able to derive the algorithm from first principles. So you are just testing esoteric knowledge - it's qualitatively no different that asking someone questions about a specific framework / API.
You could make the argument that algorithms tend to be studied more by smarter people, but if that's what you're going for you may as well ask them about their hobbies, and hire the person that is into playing chess, or doing astronomy (or whatever intellectual pursuit you care to name).
If on the other hand you are interested in a person's ability to code, ask them to do so. The last time I had to hire someone, I wrote a small application with one module that was deliberately written in an obfuscated style. I asked candidates to bring that module under control - rewrite it in a readable code style. To do this, successful candidates needed to identify what the current code was doing by examining the public interfaces in a debugger, documenting what the calls seemed to do, prepare unit tests, and then rewrite the module in a readable style. It took about a day for most candidates to do.
At the end of that, you get to see a candidate's ability to read code, use a debugger, write unit tests, write documentation, and write well structured code, which is a pretty good coverage of the typical tasks in a developer's day. I feel this gives a much more realistic assessment of a candidate's capabilities that asking questions about a more or less randomly chosen algorithm.