A biofunctional scaffold was constructed with human mesenchymal stem cells (hMSCs) encapsulated in polyelectrolyte complexation (PEC) fibers. Human MSCs were either encapsulated in PEC fibers and constructed into a fibrous scaffold or seeded on PEC fibrous scaffolds. The proliferation, chondrogenic and osteogenic differentiation of the encapsulated and seeded hMSCs were compared for a culture period of 5.5 weeks. Gene expression and extracellular matrix production showed evidences of chondrogenesis and osteogenesis in the cell-encapsulated scaffolds and cell-seeded scaffolds when the samples were cultured in the chondrogenic and osteogenic differentiation media, respectively. However, better cell proliferation and differentiation were observed on the hMSC-encapsulated scaffolds compared to the hMSC-seeded scaffolds. The study demonstrated that the cell-encapsulated PEC fibers could support proliferation and chondrogenic and osteogenic differentiation of the encapsulated-hMSCs. Together with our previous works, which demonstrated the feasibility of PEC fiber in controlled release of drug, protein and gene delivery, the reported PEC fibrous scaffold system will have the potential in composing a multi-component system for various tissue-engineering applications.