encyclo - 12:13 am on Jun 4, 2009 (gmt 0)

That's the basic idea, but it's less of an algorithm and more a case of a simple miscategorization of the IP address block. IP blocks are assigned by the appropriate Regional Internet registry. For example, in North America (and a few other places) IP addresses are assigned by the American Registry for Internet Numbers (ARIN) [arin.net]. In Europe, IP addresses are issued by RIPE [ripe.net].

If you want to do something similar to Google on your own site, you can find several geolocation databases (some for free) via a search.