Translate "Algorithm" in the caption

You have to modify \ALG@name in order to get the appropriate translation:

\documentclass[11pt]{article}
\usepackage{algorithm}% http://ctan.org/pkg/algorithms
\usepackage{algorithmic}% http://ctan.org/pkg/algorithms
\makeatletter
\renewcommand{\ALG@name}{AlGoRiThM}
\renewcommand{\listalgorithmname}{List of \ALG@name s}
\makeatother
\begin{document}
\listofalgorithms
\begin{algorithm}
\caption{Funkcija ACO}
\label{alg:aco}  
\begin{algorithmic} 
  \STATE{do something}  
\end{algorithmic}  
\end{algorithm} 
\end{document}

You may also consider using the more advanced algorithmicx bundle.