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Background: Unlike bone tissue, articular cartilage regeneration has not been very successful and has many challenges ahead. We have previously developed injectable hydrogels using photopolymerizable chitosan (MeGC) that supported growth of chondrocytes. In this study, we demonstrate a biofunctional hydrogel for specific use in cartilage regeneration by conjugating transforming growth factor-β1 (TGF-β1), a well-documented chondrogenic factor, to MeGC hydrogels impregnating type II collagen (Col II), one of the major cartilaginous extracellular matrix (ECM) components. Results: TGF-β1 was delivered from MeGC hydrogels in a controlled manner with reduced burst release by chemically conjugating the protein to MeGC. The hydrogel system did not compromise viability of encapsulated human synovium-derived mesenchymal stem cells (hSMSCs). Col II impregnation and TGF-β1 delivery significantly enhanced cellular aggregation and deposition of cartilaginous ECM by the encapsulated cells, compared with pure MeGC hydrogels. Conclusions: This study demonstrates successful engineering of a biofunctional hydrogel with a specific microenvironment tailored to promote chondrogenesis. This hydrogel system can provide promising efficacious therapeutics in the treatment of cartilage defects. [ABSTRACT FROM AUTHOR]