The official APS news agency quoted an unidentified security source as saying army troops on a search operation killed the two guerrillas in Boulzazene in the Boumerdes region, 70 kilometers (45 miles) east of Algiers.
Algeria has been fighting a years-long battle with al-Qaida in the Islamic Maghreb, or AQIM, which uses the Kabyle region, near Boumerdes, as its headquarters.
The Defense Ministry said in a rare statement Tuesday that seven insurgents had been killed and arms, ammunition and medicine recovered.
In recent years, AQIM is noted more for its reach into the Sahel region with kidnappings and its takeover of parts of northern Mali, which borders Algeria.
Algeria's government said Wednesday that contacts to free several Algerian diplomats who were taken hostage in April by another radical Islamist group in northern Mali are continuing. Foreign Ministry spokesman Amar Belani told the official APS news agency that contacts "with various channels" are taking place.
However, he wouldn't comment on a video apparently showing two of the diplomats asking President Abdelaziz Bouteflika to "answer the demands" of captors "so we can return safe and sound." The authenticity of the video, dated in November and released by the Mauritanian agency alakhbar.info, couldn't be confirmed.
Seven diplomats were taken from the Algerian Consulate in Gao, Mali, on April 5, by the Movement for Unity and Jihad in West Africa, or MUJAO, one of two radical groups controlling the north. Three were freed in July. The reported execution of one in September hasn't been officially confirmed.