Poly(ethylene glycol) (PEG) was copolymerized with ε-caprolactone and then acrylated to produce photo- crosslinked cell encapsulation hydrogels. The osteogenesis of encapsulated umbilical mesenchymal stem cells (UMSCs) was induced in these hydrogels and PEG hydrogels for comparison. The physical properties of the hydrogel, including the swelling ratio and compressive modulus, were measured. Gel degradation in phosphate buffered saline was also tested. Changes in cell morphology in the hydrogel were examined. Collagen type I gene expression, alkaline phosphatase activity, and calcium deposition were used to evaluate the degree of osteogenesis in the hydrogels. It was found that hydrogels composed of PEG copolymerized with ε-caprolactone are suitable for inducing osteogenesis of UMSCs and thus helpful for bone regeneration.