In this study, we present a straightforward approach for functional cell-based screening by co-encapsulation of secretor yeast cells and reporter mammalian cells in millions of individual agarose-containing microdroplets. Our system is compatible with ultra-high-throughput selection utilizing standard fluorescence-activated cell sorters (FACS) without need of extensive adaptation and optimization. In a model study we co-encapsulated murine interleukin 3 (mIL-3)-secreting S. cerevisiae cells with murine Ba/F3 reporter cells, which express green fluorescent protein (GFP) upon stimulation with mIL-3, and could observe specific and robust induction of fluorescence signal compared to a control with yeast cells secreting a non-functional mIL-3 mutant. We demonstrate the successful enrichment of activating mIL-3 wt-secreting yeast cells from a 1:10,000 dilution in cells expressing the inactive cytokine variant by two consecutive cycles of co-encapsulation and FACS. This indicates the suitability of the presented strategy for functional screening of high-diversity yeast-based libraries and demonstrates its potential for the efficient isolation of clones secreting bioactive recombinant proteins.