Bone marrow-derived mesenchymal stem cells (MSCs) have strong potential in regeneration of musculoskeletal tissues including cartilage and bone. The microenvironment, comprising of scaffold and soluble factors, plays a pivotal role in determining the efficacy of cartilage tissue regeneration from MSCs. In this study, we investigated the effect of a three-dimensional synthetic-biological composite hydrogel scaffold comprised of poly (ethylene glycol) (PEG) and chondroitin sulfate (CS) on chondrogenesis of MSCs. The cells in CS-based bioactive hydrogels aggregated in a fashion which mimicked the mesenchymal condensation and produced cartilaginous tissues with characteristic morphology and basophilic extracellular matrix production. The aggregation of cells resulted in an enhancement of both chondrogenic gene expressions and cartilage specific matrix production compared to control PEG hydrogels containing no CS-moieties. Moreover, a significant down-regulation of type X collagen expression was observed in PEG/CS hydrogels, indicating that CS inhibits the further differentiation of MSCs into hypertrophic chondrocytes. Overall, this study demonstrates the morphogenetic role of bioactive scaffold-mediated microenvironment on temporal pattern of cartilage specific gene expressions and subsequent matrix production during MSC chondrogenesis.