Despite recent progress, segmental bone defect repair is still a significant challenge in orthopedic surgery. While bone tissue engineering approaches using biodegradable matrices along with bone/blood vessel forming cells offered improved possibilities, current regenerative strategies lack the ability to achieve vascularized bone regeneration in critical-sized/segmental bone defects. In this study, we introduced and evaluated a two-pronged approach for vascularized bone regeneration in vivo. The goal was to demonstrate vascularized bone formation using oxygen tension-controlled (OTC) matrices seeded with bone and blood vessel forming cells. OTC matrices were coimplanted with rabbit mesenchymal stem cells (MSCs) and peripheral blood-derived endothelial progenitor cells (PB-EPCs) to demonstrate the osteogenic and vasculogenic differentiation of these cells, postseeding on a matrix, especially deep inside the matrix pore structure. Matrices coimplanted with varied rabbit MSC and PB-EPC ratios (1:4, 1:1, and 4:1) were assessed in a nude mouse subcutaneous implantation model to determine a coimplantation ratio with superior osteogenic as well as vasculogenic properties. The implants were analyzed, at week 8, for endothelial (CD31 and Von Willebrand factor [vWF]) and osteogenic marker (RunX2 and Col I) staining qualitatively and collagen deposition and number of vessel formation quantitatively. Results from these experiments established MSC-to-PB-EPC ratio 1:1 as the best coimplantation ratio. OTC matrix with 1:1 coimplantation ratio was assessed for segmental bone defect repair in a rabbit critical-sized bone defect model. The group under investigation was OTC matrix, and the matrix was seeded with MSCs, EPCs, or MSCs:EPCs in a 1:1 ratio. Explants at week 12 were evaluated for bone defect repair via micro-CT and histology. Results from rabbit in vivo experiments show enhanced mineralization and vascularization for the 1:1 coimplantation group. Overall, the study establishes a two-pronged approach involving OTC matrix and effective progenitors for large-area and vascularized bone regeneration.