Here, we demonstrate the flexibility of peptide-functionalized poly(ethylene glycol) (PEG) hydrogels for modeling tumor progression. The PEG hydrogels were formed using thiol-ene chemistry to incorporate a matrix metalloproteinase-degradable peptide crosslinker (KKCGGPQG↓IWGQGCKK) permissive to proteolytic remodeling and the adhesive CRGDS peptide ligand. Tumor cell function was investigated by culturing WM239A melanoma cells on PEG hydrogel surfaces or encapsulating cells within the hydrogels, and either as monocultures or indirect (non-contact) cocultures with primary human dermal fibroblasts (hDFs). WM239A cluster size and proliferation rate depended on the shear elastic modulus for cells cultured on PEG hydrogels, while growth was inhibited by coculture with hDFs regardless of hydrogel stiffness. Cluster size was also suppressed by hDFs for WM239A cells encapsulated in PEG hydrogels, which is consistent with cells seeded on top of hydrogels. Notably, encapsulated WM239A clusters and single cells adopted invasive phenotypes in the hDF coculture model, which included single cell and collective migration modes that resembled invasion from human melanoma patient-derived xenograft tumors encapsulated in equivalent PEG hydrogels. Our combined results demonstrate that peptide-functionalized PEG hydrogels provide a useful platform for investigating aspects of tumor progression in 2D and 3D microenvironments, including single cell migration, cluster growth and invasion.