There is a substantial need for methods that prolong cell persistence and enhance functionality in situ to enhance cell-based tissue repair. Bone morphogenetic protein-2 (BMP-2) is often used at high concentrations for osteogenic differentiation of mesenchymal stem cells (MSCs) but can induce apoptosis. Biomaterials facilitate the delivery of lower doses of inductive molecules, potentially reducing side effects and localizing materials at the target site. Photocrosslinked alginate hydrogels (PAHs) can deliver osteogenic materials to irregular-sized bone defects, providing improved control over material degradation compared to ionically-crosslinked hydrogels. We hypothesized that the delivery of human MSCs and BMP-2 from a PAH would increase cell persistence by reducing apoptosis, while promoting osteogenic differentiation and enhancing bone formation compared to MSCs in PAHs without BMP-2. BMP-2 significantly decreased apoptosis and enhanced survival of photoencapsulated MSCs, while simultaneously promoting osteogenic differentiation in vitro. Bioluminescence imaging revealed increased MSC survival when implanted in BMP-2 PAHs over 4 weeks. Bone defects treated with MSCs in BMP-2 PAHs demonstrated 100% union as early as 8 weeks and significantly higher bone volumes at 12 weeks, while defects with MSC-entrapped PAHs alone did not fully bridge. This study demonstrates that transplantation of MSCs with BMP-2 in PAHs achieves robust bone healing, providing a promising platform for use in bone repair.