One major problem of current cartilage repair techniques is that three-dimensional encapsulated mesenchymal progenitor cells frequently differentiate into hypertrophic cells that express type X collagen and osteogenic marker genes. Studies on wild-type cells of murine mesenchymal C3H10T1/2 progenitor cells as well as on cells transfected with cDNA encoding for bone morphogenetic protein (BMP)-2 or -4 in alginate revealed that the formation of markers for osteogenesis and chondrogenic hypertrophy apparently depended on the BMP-transfection. Cells were encapsulated in ultrahigh-viscosity, clinical grade alginate and differentiation was studied over a period of 17 days. Consistent with results published previously staining with haematoxylin-eosin or Alcian blue, immunohistochemical analysis, and quantitative RT-PCR confirmed the expression of chondrogenic markers (chondroitin-4- and -6-sulfate as well as type II collagen). Production of chondrogenic markers was particularly high in BMP-4 transfected cells. Hypertrophic chondrogenesis did not occur in BMP-4 transfected cells, as revealed by measurement of type X collagen, but could be demonstrated for wild-type cells and to some extent for BMP-2 transfected cells. The osteogenic markers, type I collagen, alkaline phosphatase, and Cbfa1 were upregulated in all cell lines even though the levels and the time of upregulation differed significantly. In any case, the markers were less and only very shortly expressed in BMP-4 transfected cells as revealed quantitatively by real time RT-PCR. Thus, the in vitro results suggested that BMP-4 is a very promising candidate for suppressing chondrogenic hypertrophy, while simultaneously enhancing the production of chondrogenic components.