Repair of critical-size articular cartilage defects typically involves delivery of cells in biodegradable, 3D matrices. Differences in the developmental status of mesenchymal stem cells (MSCs) and terminally differentiated mature chondrocytes might be a critical factor in engineering appropriate 3D matrices for articular cartilage tissue engineering. This study examined the relationship between material-driven early cell morphological adaptations and chondrogenic outcomes, by studying the influence of aligned collagen type I (Col I) presentation on chondrocytes and MSC in interfacial polyelectrolyte complexation (IPC)-based hydrogels. In the absence of Col I, both chondrocytes and MSCs adopted rounded cell morphology and formed clusters, with chondrocyte clusters favoring the maintenance of hyaline phenotype, while MSC clusters differentiated to fibro-superficial zone-like chondrocytes. Encapsulated chondrocytes in IPC-Col I hydrogel adopted a fibroblastic morphology forming fibro-superficial zone-like phenotype, which could be reversed by inhibiting actin polymerization using cytochalasin D (CytD). In contrast, adoption of fibroblastic morphology by encapsulated MSCs in IPC-Col I facilitated superior chondrogenesis, generating a mature, hyaline neocartilage tissue. CytD treatment abrogated the elongation of MSCs and brought about a single cell-like state, resulting in insignificant chondrogenic differentiation, underscoring the essential requirement of providing matrix environments that are amenable to cell-cell interactions for robust MSC chondrogenic differentiation. Our study demonstrates that MSCs and culture-expanded chondrocytes favour differential microenvironmental niches and emphasizes the importance of designing biomaterials that meet cell type-specific requirements, in adopting chondrocyte or MSC-based approaches for regenerating hyaline, articular cartilage.