Some residents of the shantytown are demanding that the city authorities include them on a list of those eligible for re-housing.
About 400 policemen in riot gear used tear gas and an armoured vehicle to break up the demonstration.
One officer was seriously hurt during an unsuccessful attempt to clear the protesters from a road they had been blocking, a Reuters reporter at the scene said.
|Residents said they were protesting against squalid conditions in the suburb [AFP]
Police sources said several other officers had been hurt.
There was a lull on Tuesday evening after the police's failed assault, but the protesters and police remained in a stand-off on opposite sides of a road.
Residents said they were protesting against their squalid living conditions in the working class suburb.
According to accounts in the Algerian press, up to 10 people live in a single room or in shacks.
Algiers has a heavy security presence due to ongoing skirmishes between armed groups and government forces.
After more than a decade of conflict between security forces and armed groups, the violence has subsided sharply in the past few years.
"The unrest in Diar Echams is just an alarm bell"
Mohamed Lagab, political analyst
Many people in the former French colony of 35 million have now switched their focus to bread-and-butter issues, expressing frustration at the lack of jobs and housing.
"The current government has failed to solve social problems," Mohamed Lagab, an Algerian political analyst, said.
"The unrest in Diar Echams is just an alarm bell."
The government has spent billions of dollars in oil and gas revenues on projects to improve living standards and this year announced it would spend a further $150 billion on modernising the economy and creating jobs.
Algeria, an Opec member, is the world's fourth biggest exporter of natural gas.