I know that Pro Logic decodes matrixed stereo signals into emulated 5.1 surround. But let's say that I'm watching a movie recorded in 2.1 stereo.
Will the algorithm of Dolby Pro Logic be able to reproduce an emulated 5.1 surround out of it?
Yes. How well it works depends on the source.
Most surround sound receivers have other more aggressive modes for people that like to hear more our of all the speakers more of the time.
If you leave your receiver in Dolby it will revert to ProLogic when the source is 2.0
2.1 is done analog since the bass can be crossed over to the subwoofer in the receiver.