Bone marrow mesenchymal stem cells (MSCs) have been used for bone tissue engineering due to their osteogenic differentiation capability, but their application is controversial. To enhance their capability, we prepared biodegradable gelatin sponges incorporating β-tricalcium phosphate ceramics (GT sponge), which has been shown to possess excellent controlled drug-release properties. The GT sponge was used as a carrier for both rat MSCs and bone morphogenetic protein-2 (BMP-2) and osteogenic differentiation was assessed by subcutaneous implantation of four different kinds of implants, i.e. GT-alone, MSC–GT composites, BMP–GT composites and BMP–GT composites supplemented with MSCs (BMP–MSC–GT) in rats. Two weeks after implantation, histological sections showed new bone formation in the peripheral parts of the BMP–GT and in almost the total volume of the BMP–MSC–GT implants. After 4 weeks, histology as well as microCT analyses demonstrated extensive bone formation in BMP–MSC–GT implants. Gene expression and biochemical analyses of both alkaline phosphatase and bone-specific osteocalcin confirmed the histological findings. These results indicate that the combination of MSCs, GT and BMP synergistically enhances osteogenic capability and provides a rational basis for their clinical application in bone reconstruction. Copyright © 2011 John Wiley & Sons, Ltd.