Immunomodulatory human mesenchymal stromal cells (hMSC) have been incorporated into therapeutic protocols to treat secondary inflammatory responses post-spinal cord injury (SCI) in animal models. However, limitations with direct hMSC implantation approaches may prevent effective translation for therapeutic development of hMSC infusion into post-SCI treatment protocols. To circumvent these limitations, we investigated the efficacy of alginate microencapsulation in developing an implantable vehicle for hMSC delivery. Viability and secretory function were maintained within the encapsulated hMSC population, and hMSC secreted anti-inflammatory cytokines upon induction with the pro-inflammatory factors, TNF-α and IFN-γ. Furthermore, encapsulated hMSC modulated inflammatory macrophage function both in vitro and in vivo, even in the absence of direct hMSC-macrophage cell contact and promoted the alternative M2 macrophage phenotype. In vitro, this was evident by a reduction in macrophage iNOS expression with a concomitant increase in CD206, a marker for M2 macrophages. Finally, Sprague-Dawley rat spinal cords were injured at vertebra T10 via a weight drop model (NYU model) and encapsulated hMSC were administered via lumbar puncture 24 h post-injury. Encapsulated hMSC localized primarily in the cauda equina of the spinal cord. Histological assessment of spinal cord tissue 7 days post-SCI indicated that as few as 5 × 104 encapsulated hMSC yielded increased numbers of CD206-expressing macrophages, consistent with our in vitro studies. The combined findings support the inclusion of immobilized hMSC in post-CNS trauma tissue protective therapy, and suggest that conversion of macrophages to the M2 subset is responsible, at least in part, for tissue protection. Biotechnol. Bioeng. 2011;108: 2747–2758. © 2011 Wiley Periodicals, Inc.