How do you hook into a path being created via pathauto?
The UI has this built in as it happens, if you visit http://mysite.com/admin/build/path/pathauto and look in the "General Settings" fieldset you'll find a textbox containing a list of strings to remove from aliases:



hook_pathauto_alias_alter is definitely the right way to do it; it's available in both the 1.x and 2.x branches. Have you run any debug code to see if the hook is actually being called? And did you clear the caches? Hook implementations are cached (in Drupal 7 anyway; I can't remember if they are in Drupal 6 or not).

In case you're still wondering most modules that declare hooks come with a MODULENAME.api.php file which lists those hooks and how to use them. In the case of pathauto the file and hook function declarations are there, but sadly there's no documentation.