We investigated the encapsulation of BMP-2 gene-modified mesenchymal stem cells (MSCs) in alginate-poly-L-lysine (APA) microcapsules for the persistent delivery of bone morphogenic protein-2 (BMP-2) to induce bone formation. An electrostatic droplet generator was employed to produce APA microcapsules containing encapsulated beta-gal or BMP-2 gene-transfected bone marrow-derived MSCs. We found that X-gal staining was still positive 28 days after encapsulation. Encapsulated BMP-2 gene-transfected cells were capable of constitutive delivery of BMP-2 proteins for at least 30 days. The encapsulated BMP-2 gene-transfected MSCs or the encapsulated non-gene transfer MSCs (control group) were cocultured with the undifferentiated MSCs. The gene products from the encapsulated BMP-2 cells could induce the undifferentiated MSCs to become osteoblasts that had higher alkaline phosphatase (ALP) activity than those in the control group (p < 0.05). The APA microcapsules could inhibit the permeation of fluorescein isothiocyanate-conjuncted immunoglobulin G. Mixed lymphocyte reaction also indicates that the APA microcapsules could prevent the encapsulated BMP-2 gene-transfected MSCs from initiating the cellular immune response. These results demonstrated that the nonautologous BMP-2 gene-transfected stem cells are of potential utility for enhancement of bone repair and bone regeneration in vivo. (c) 2007 Elsevier Inc. All rights reserved.