Different cell- and biomaterial-based tissue engineering techniques are under investigation to restore damaged tissue. Strategies that use chondrogenic cells or tissues in combination with bioresorbable delivery materials are considered to be suitable to regenerate bio-artificial cartilage. Three-dimensional (3-D) cell embedding techniques can provide anchorage-independent cell growth and homogenous spatial cell arrangement, which play a key role in the maintenance of the characteristic phenotype and thus the formation of differentiated tissue. We developed a new injectable high water content (90%) hydrogel formulation with 5% sodium alginic acid and 5% gelatin as a temporary supportive intercellular matrix for 3-D cell culture. The objective was to determine whether the in vitro hydrogel culture of chondrocytes could preserve hyaline characteristics and thus could provide cartilage regeneration in vitro. Chondrocytes harvested from knee joints of skeletally mature sheep were cultured 3-D in hydrogel (7 × 106 cells/ml, 2.8-µl beads) for up to 10 weeks. Cell morphology and viability were evaluated with light microscopy, and proliferative activity was assessed with antibromodeoxyuridine immunofluorescence. Expression of collagens type I (COL1) and II (COL2), cartilage proteoglycans (PG) and hyaluronan synthases (HAS) were studied immunohistochemically. We observed that up to 36% of chondrocytes proliferated, while almost 100% presented a differentiated spheroidal phenotype. After an initial decrease at 2 weeks, cell density recovered to 85% of the initial absolute value at 10 weeks. Expression of hyaline matrix molecules resembled the in vivo pattern with increasing spatial deposition of PG and COL2. The proportion of PG-positive cells increased from initially 13 to 53% after 10 weeks, in contrast to consistently 100% COL2-positive cells. We conclude that 3-D hydrogel culture, even without mechanical stimulation or growth factor application, can keep chondrocytes in a differentiated state and provides a chondrogenic cell environment for in vitro cartilage regeneration for at least 10 weeks. Moreover, this hydrogel appears to be a suitable cell delivery material for subsequent in vivo implantation.