Chitosan-beta glycerophosphate-hydroxyethyl cellulose (CH-GP-HEC) is a biocompatible and biodegradable scaffold exhibiting a sol–gel transition at 37°C. Chondrogenic factors or mesenchymal stem cells (MSCs) can be included in the CH-GP-HEC, and injected into the site of injury to fill the cartilage tissue defects with minimal invasion and pain. The possible impact of the injectable CH-GP-HEC on the viability of the encapsulated MSCs was assessed by propidium iodide-fluorescein diacetate staining. Proliferation of the human and rat MSCs was also determined by MTS assay on days 0, 7, 14 and 28 after encapsulation. To investigate the potential application of CH-GP-HEC as a drug delivery device, the in vitro release profile of insulin was quantified by QuantiPro-BCA™ protein assay. Chondrogenic differentiation capacity of the encapsulated human MSCs (hMSCs) was also determined after induction of differentiation with transforming growth factor β3. MSCs have very good survival and proliferative rates within CH-GP-HEC hydrogel during the 28-day investigation. A sustained release of insulin occurred over 8 days. The CH-GP-HEC hydrogel also provided suitable conditions for chondrogenic differentiation of the encapsulated hMSCs. In conclusion, the high potential of CH-GP-HEC as an injectable hydrogel for cartilage tissue engineering is emphasised.