According to Dave Troy, Google seems to be using the Geohash algorithm:
Google is employing the GeoHash algorithm I’ve been pushing to do spatial searching using BigTable. Since database schemes like BigTable don’t support traditional GIS extensions/spatial indexes, GeoHash allows for a simple bounding box search using truncated GeoHash substrings. I will post separately about this shortly, as I am working on some GeoHash tools to expand this functionality. This is of particular interest to AppEngine developers.
Nice!