The people arrested and imprisoned in Bouira, a town in the northeastern Kabylie region, were informers for the Salafist Group for Preaching and Combat (GSPC), security officials said on Monday.
The GSPC, set up in 1998 and which last year declared its allegiance to Usama bin Ladin's al-Qaida network, is on Washington's list of 'terrorist' organisations.
Security sources said the dismantled network in Bouira had been active since 1990, two years before an insurgency erupted after the army called off an election an Islamic party was poised to win.
The GSPC, despite having several dissident offshoots, remains very active particularly in Kabylie, where two soldiers were killed and four injured in a bomb attack on Sunday.
A local army chief said the movement had recently managed to recruit youths in the poorer districts of towns hit by unemployment. Its overall numbers are estimated at between 400 and 500.
The Algerian insurgency has claimed more than 100,000 lives.
Meanwhile, a government-backed commission on Monday proposed reforming Algeria's controversial family code to give women more rights, a move seen linked to upcoming presidential elections.
"The current law makes a woman minor from birth to death. She has only one right - to shut up"
President Abd Al-Aziz Butaflika, seeking re-election on 8 April, has come under pressure for failing to live up to his 1999 election promise to give more rights in a country where 52% of the 32 million population are women.
"The current law makes a woman minor from birth to death. She has only one right - to shut up," said Ouardia Harhad, spokeswoman for the independent women's rights group Aitdf.
"The only time in a woman's life she can consider herself not a minor is when she votes or commits a crime," she said.
The government commission was set up in October to quell mounting criticism in the Muslim North African country, particularly after neighbouring Morocco said it would improve women's rights in marriage and divorce.