Nanoparticles have offered a unique set of properties for drug delivery including high drug loading capacity, combinatorial delivery, controlled and sustained drug release, prolonged stability and lifetime, and targeted delivery. To further enhance therapeutic index, especially for localized application, nanoparticles have been increasingly combined with hydrogels to form a hybrid biomaterial system for controlled drug delivery. Herein, we review recent progresses in engineering such nanoparticle-hydrogel hybrid system (namely ‘NP-gel’) with a particular focus on its application for localized drug delivery. Specifically, we highlight four research areas where NP-gel has shown great promises, including (1) passively controlled drug release, (2) stimuli-responsive drug delivery, (3) site-specific drug delivery, and (4) detoxification. Overall, integrating therapeutic nanoparticles with hydrogel technologies creates a unique and robust hybrid biomaterial system that enables effective localized drug delivery.