The limited ability to vascularize and perfuse thick, cell-laden tissue constructs has hindered efforts to engineer complex tissues and organs, including liver, heart and kidney. The emerging field of modular tissue engineering aims to address this limitation by fabricating constructs from the bottom up, with the objective of recreating native tissue architecture and promoting extensive vascularization. In this paper, we report the elements of a simple yet efficient method for fabricating vascularized tissue constructs by fusing biodegradable microcapsules with tunable interior environments. Parenchymal cells of various types, (i.e. trophoblasts, vascular smooth muscle cells, hepatocytes) were suspended in glycosaminoglycan (GAG) solutions (4%/1.5% chondroitin sulfate/carboxymethyl cellulose, or 1.5 wt% hyaluronan) and encapsulated by forming chitosan-GAG polyelectrolyte complex membranes around droplets of the cell suspension. The interior capsule environment could be further tuned by blending collagen with or suspending microcarriers in the GAG solution These capsule modules were seeded externally with vascular endothelial cells (VEC), and subsequently fused into tissue constructs possessing VEC-lined, inter-capsule channels. The microcapsules supported high density growth achieving clinically significant cell densities. Fusion of the endothelialized, capsules generated three dimensional constructs with an embedded network of interconnected channels that enabled long-term perfusion culture of the construct. A prototype, engineered liver tissue, formed by fusion of hepatocyte-containing capsules exhibited urea synthesis rates and albumin synthesis rates comparable to standard collagen sandwich hepatocyte cultures. The capsule based, modular approach described here has the potential to allow rapid assembly of tissue constructs with clinically significant cell densities, uniform cell distribution, and endothelialized, perfusable channels.