In order to improve the hydrophilicity of ammonium polyphosphate (APP), as well as its compatibility with composite matrix, in this research, beta-cyclodextrin (b-CD) was crosslinked by polydiphenylmethane diisocyanate (PMDI) and used as clothing to prepare microencapsulated APP (MCAPP) via polymerization in situ. Then, APP and MCAPP were mixed with wood-flour and polypropylene to manufacture wood-flour/polypropylene composites (WPCs) by hot pressing. Both APP and MCAPP were characterized by Fourier transform infrared spectroscopy (FTIR), X-ray photoelectron spectroscopy (XPS), scanning electron microscopy (SEM), water solubility tests, and water contact angle (WCA) tests. Limiting oxygen index (LOI) and cone calorimetry tests were used to investigate the flame retardancy of WPCs. Moreover, laser Raman spectroscopy and real-time FTIR (RT-FTIR) were used to explore the flame retardant mechanism. Results indicated that APP was successfully coated by the crosslinked b-CD. MCAPP showed lower water solubility and better surface hydrophobicity, and WPC/ MCAPP performed better flame retardnacy and mechanical properties.