Hydrogel-based biomaterial systems have great potential for tissue reconstruction by serving as temporary scaffolds and cell delivery vehicles for tissue engineering (TE). Hydrogels have poor mechanical properties and their rapid degradation limits the development and application of hydrogels in TE. In this study, nanofiber reinforced composite hydrogels were fabricated by incorporating electrospun poly(ε-caprolactone) (PCL)/gelatin 'blend' or 'coaxial' nanofibers into gelatin hydrogels. The morphological, mechanical, swelling and biodegradation properties of the nanocomposite hydrogels were evaluated and the results indicated that the moduli and compressive strengths of the nanofiber reinforced hydrogels were remarkably higher than those of pure gelatin hydrogels. By increasing the amount of incorporated nanofibers into the hydrogel, the Young's modulus of the composite hydrogels increased from 3.29 ± 1.02 kPa to 20.30 ± 1.79 kPa, while the strain at break decreased from 66.0 ± 1.1% to 52.0 ± 3.0%. Compared to composite hydrogels with coaxial nanofibers, those with blend nanofibers showed higher compressive strength and strain at break, but with lower modulus and energy dissipation properties. Biocompatibility evaluations of the nanofiber reinforced hydrogels were carried out using bone marrow mesenchymal stem cells (BM-MSCs) by cell proliferation assay and immunostaining analysis. The nanocomposite hydrogel with 25 mg ml(-1) PCL/gelatin 'blend' nanofibers (PGB25) was found to enhance cell proliferation, indicating that the 'nanocomposite hydrogels' might provide the necessary mechanical support and could be promising cell delivery systems for tissue regeneration.