The osteogenic differentiation of bone marrow-derived human mesenchymal stem cells (MSCs) in a collagen I hydrogel was investigated. Collagen hydrogels with 7.5 × 10⁵ MSCs ml⁻¹ were fabricated and cultured for 6 weeks in a defined, osteogenic differentiation medium. Histochemistry revealed morphologically distinct, chondrocyte-like cells, surrounded by a sulfated proteoglycan-rich extracellular matrix in the group treated with bone morphogenetic protein 2 (BMP-2), while cells cultured with dexamethasone, ascorbate-2-phosphate, and β-glycerophosphate displayed a spindle-shaped morphology and deposited a mineralized matrix. Real-time polymerase chain reaction (RT-PCR) analyses revealed a specific chondrogenic differentiation with the expression of cartilage-specific markers in the BMP-2-treated group and a distinct expression pattern of the osteogenic markers alkaline phosphatase (ALP), type I collagen, osteocalcin (OC), and cbfa-1 in the group treated with an osteogenic standard medium. The collagen gels were used to engineer a cell laden medical grade ε-polycaprolactone (PCL)-hydrogel construct for segmental bone repair showing good bonding at the scaffold hydrogel interface and even cell distribution. The results show that MSCs cultured in a collagen I hydrogel are able to undergo a distinct osteogenic differentiation pathway when stimulated with specific differentiation factors and suggest that collagen I hydrogels are a suitable means to facilitate cell seeding of scaffolds for bone tissue engineering applications.