The aim of this study was to investigate the suppression of inflammation and enhancement of osteogenesis using chitosan‐coated calcium hydroxide‐loaded microcapsules (CS‐EC@Ca microcapsules) in vivo. Circular defects were created in the mandibular bones of rabbits and filled with Ca(OH)2, Bio‐oss, or CS‐EC@Ca microcapsules, and rabbits without drug implantation served as the controls. Lipopolysaccharides were injected in situ daily in all groups for 7 days. Mandibular bones were investigated at 4 and 12 weeks after surgery using micro‐CT, histological observations, and real‐time PCR analysis. At the postoperation, there was more substantial nascent bone in the microcapsule and Bio‐oss groups than in the control group. The recovery of the rabbits in the Ca(OH)2 group was slower than the control group, as determined using micro‐CT and histological staining. Osteocalcin and collagen type I production was not significantly different between the microcapsule and Bio‐oss groups (p > 0.05), but the expression levels of the two molecules were significantly increased compared to the control and Ca(OH)2 groups at postoperation (p < 0.05). The mRNA transcript levels of inflammatory factors in the microcapsule group had the most reduced expression of IL‐6 and TNF‐α (p < 0.05). The microcapsules significantly reduced inflammation and promoted osteogenesis in this rabbit model of inflammatory bone destruction. Our findings indicate that CS‐EC@Ca microcapsules hold potential for use in apical periodontitis treatment. © 2018 Wiley Periodicals, Inc. J Biomed Mater Res Part A: 106A: 3222–3230, 2018.