Cell encapsulation is a promising approach for long-term delivery of therapeutic agents. Nonetheless, this system has failed to reach clinical settings, as the entrapped cells provoke a host immune reaction. Mesenchymal stem cells (MSCs), however, potentially may overcome this impediment and serve as a promising platform for cell-based microencapsulation. They are known to be hypoimmunogenic and can be genetically modified to express a variety of therapeutic factors. We have designed alginate-PLL microcapsules that can encapsulate human MSCs (hMSCs) for extended periods, as demonstrated by fluorescence and H(3)-thymidine assays. The encapsulated hMSCs maintained their mesenchymal surface markers and differentiated to all the typical mesoderm lineages. In vitro and in vivo immunogenicity studies revealed that encapsulated hMSCs were significantly hypoimmunogenic, leading to a 3-fold decrease in cytokine expression compared to entrapped cell lines. The efficacy of such systems was demonstrated by genetically modifying the cells to express the hemopexin-like protein (PEX), an inhibitor of angiogenesis. Live imaging and tumor measurements showed that encapsulated hMSC-PEX injected adjacent to glioblastoma tumors in nude mice led to a significant reduction in tumor volume (87%) and weight (83%). We clearly demonstrate that hMSCs are the cell of choice for microencapsulation cell based-therapy, thus bringing this technology closer to clinical application.