This looks to me like a CRC algorithm.
If it is (and I haven't analysed it extensively) it is not very well implemented.
Crypto-wise the algorithm is linear and hence trivially insecure. It may be a reasonable hashing algorithm for a certain class of problem, but it certainly isn't a good encryption algorithm.
Here is a guide to CRCs "everything you ever wanted to know but were afraid to ask..."
http://www.dementia.org/~strong/public/faqs/crc.faq.txt
And here is my favourite reference for crypto design
Applied Cryptography
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