Living tissues consist of groups of cells organized in a controlled manner to perform a specific function. Spatial distribution of cells within a three-dimensional matrix is critical for the success of any tissue-engineering construct. Fibers endowed with cell-encapsulation capability would facilitate the achievement of this objective. Here we report the synthesis of a cell-encapsulated fibrous scaffold by interfacial polyelectrolyte complexation (IPC) of methylated collagen and a synthetic terpolymer. The collagen component was well distributed in the fiber, which had a mean ultimate tensile strength of 244.6+/-43.0 MPa. Cultured in proliferating medium, human mesenchymal stem cells (hMSCs) encapsulated in the fibers showed higher proliferation rate than those seeded on the scaffold. Gene expression analysis revealed the maintenance of multipotency for both encapsulated and seeded samples up to 7 days as evidenced by Sox 9, CBFA-1, AFP, PPARgamma2, nestin, GFAP, collagen I, osteopontin and osteonectin genes. Beyond that, seeded hMSCs started to express neuronal-specific genes such as aggrecan and MAP2. The study demonstrates the appeal of IPC for scaffold design in general and the promise of collagen-based hybrid fibers for tissue engineering in particular. It lays the foundation for building fibrous scaffold that permits 3D spatial cellular organization and multi-cellular tissue development.