A little curious, your syntax looks good. Have you messed up some fonts on your system? Or perhaps your 'interpreter'value is set none( doc document details )?
Check this with <<22> = handle from xlabel):
get(hx, 'Interpreter')
and install it with:
set(hx, 'Interpreter', 'tex')
, Latex tex.
x = 0:40;
y = x.^2;
plot(y,x, 'x')
title('\alpha \beta \gamma');
hx = xlabel('Symbol $\sqrt{\Delta}$ ','interpreter','latex');
hy = ylabel('Symbol $\sqrt{\epsilon}$','interpreter','latex');

!
tex:
hx = xlabel('\Delta');
hy = ylabel('\epsilon');
:

delta :
xlabel('Symbol $\sqrt{\Delta}$ ','interpreter','tex');
ylabel('Symbol $\sqrt{\epsilon}$','interpreter','tex');
:
: get(0,'DefaultAxesFontName')?
, Helvetica Arial?
set(0,'DefaultAxesFontName','Helvetica');
, (, Ubuntu 12.xx) -.