Controlling the phenotype of transplanted stem cells is integral to ensuring their therapeutic efficacy. Hypoxia is a known regulator of stem cell fate, the effects of which can be mimicked using hypoxia-inducible factor (HIF) prolyl hydroxylase inhibitors such as dimethyloxalylglycine (DMOG). By releasing DMOG from mesenchymal stem cell (MSC) laden alginate hydrogels, it is possible to stabilize HIF-1α and enhance its nuclear localization. This correlated with enhanced chondrogenesis and a reduction in the expression of markers associated with chondrocyte hypertrophy, as well as increased SMAD 2/3 nuclear localization in the encapsulated MSCs. In vivo, DMOG delivery significantly reduced mineralisation of the proteoglycan-rich cartilaginous tissue generated by MSCs within alginate hydrogels loaded with TGF-β3 and BMP-2. Together these findings point to the potential of hypoxia mimicking hydrogels to control the fate of stem cells following their implantation into the body. STATEMENT OF SIGNIFICANCE: There are relatively few examples where in vivo delivery of adult stem cells has demonstrated a true therapeutic benefit. This may be attributed, at least in part, to a failure to control the fate of transplanted stem cells in vivo. In this paper we describe the development of hydrogels that mimic the effects of hypoxia on encapsulated stem cells. In vitro, these hydrogels enhance chondrogenesis of MSCs and suppress markers associated with chondrocyte hypertrophy. In an in vivo environment that otherwise supports progression along an endochondral pathway, we show that these hydrogels will instead direct mesenchymal stem cells (MSCs) to produce a more stable, cartilage-like tissue. In addition, we explore potential molecular mechanisms responsible for these phenotypic changes in MSCs.