In this article, a novel local hydrophobic drug delivery system: nanoparticles in thermo-sensitive hydrogel, was demonstrated. First, honokiol, as a model hydrophobic drug, loaded poly(epsilon-caprolactone)-poly(ethylene glycol)-poly(epsilon-caprolactone) (PCEC) nanoparticles were prepared by emulsion solvent evaporation method, and then were incorporated into thermo-sensitive F127 hydrous matrix. The obtained injectable hydrophobic drug delivery system can act as a depot for sustained release of honokiol in situ. The lower critical solution temperature (LCST) of the composite matrix increases with increase in the mass of incorporated nanoparticles, or with decrease in the amount of residual organic solvent in the system. Honokiol release profile in vitro was studied, and the results showed that honokiol could be sustained released from the system. The described injectable drug delivery system might have great potential application for local delivery of hydrophobic drugs such as honokiol.