1. To recover a lost album, first locate its most recent backup file (with a .pal extension) or that of any other date you prefer. On my Mac, it's in User/Library/Application Support/Google/Picasa3/Picasa3Albums/backup.
In the same directory, there should be another folder with a funny name (like ce5639026adb24fbfbfb4dded3c37e4f). This is the current database; it contains information about all the albums (or none) that should appear in Picasa if you are to start the application immediately. This is saved from your last Picasa session. In case no such folder exists, just open and close Picasa to generate one.
2. In the backup folder, there are many sub-folders each named after a certain date where some activities take place in Picasa. Each folder has some .pal files with very cryptic names such as 95a8b8e741e769511d518d04410be0c1.
To know which .pal file refers to the album you're looking for, open them one by one with a text edit application. You will see that listed are the paths that lead to all pictures in that album. For example,
Also take note of the database ID (abbr: DBID) provided at the second line from the top of the document, e.g:
3. Make sure Picasa is not already on. Copy the appropriate .pal file(s) into the current database folder mentioned previously.
4. Launch Picasa and you should see your lost album re-appear!
What happened is that when Picasa is launched, it will look into the current database folder to find which .pal files have a different DBID from the current database, and update those into the new session. When the session is terminated, the foreign DBID is then converted to that of the current ID.
If your album is lost because you have moved the pictures that belong to it, you will need to edit the paths contained in the associated .pal file. For more details, refer here