The objective of this study was to evaluate an algorithm for the management of children with persistent/chronic diarrhea at a community level hospital. The study was carried out in the pediatric OPD of a 150 bed trust hospital catering to children from poor, rural and urban slums. Fifty clinically stable children (6 months-5 years old, mean = 19.7 months) with persistent or chronic diarrhea refusing admission, being managed on an outpatient basis, were enrolled prospectively. A detailed history and physical examination were done for each child to ascertain the cause of diarrhea. They were managed using a pre-tested simplified algorithm and monitored for symptom improvement using a questionnaire 15 days, 1 month and 3 months after initiation of therapy. The average cost for treatment of each child was also calculated. Twenty-one (42%) children had persistent diarrhea. Seven (14%) infants with a typical history of lactose malabsorption responded to a trial of WHO feeding protocols or lactose/sucrose free milk. Four (8%) infants had chronic non-specific diarrhea. A total of 71.8% (28/39) of children were treated satisfactorily with albendazole or metronidazole and Cotrimaxazole along with hematinics and multivitamins. Three (6%) children were diagnosed with abdominal tuberculosis. Four (8%) had raised anti-tissue tranglutaminase antibodies (age 18-34 months). The algorithm used was successful in managing all the children with chronic diarrhea. The average cost per managed case was US$10. Further, multi-center evaluations of similar algorithms are needed to validate the observations in the present study.