Epithelial cells polarize and differentiate into organotypic cell aggregates in response to cell-cell and cell-matrix interactions. For example, Madin-Darby Canine Kidney (MDCK) cells form spherical cell aggregates (cysts) with distinct apical and basolateral polarity when cultured three dimensionally (embedded) in type I collagen gels. To investigate the effects of individual extracellular factors on epithelial morphogenesis, we engineered fast degrading protease-responsive polyethylene glycol (PEG) hydrogels functionalized with controlled densities of various bioligands (RGD peptide, laminin-1 (LN)) to allow 3D culturing of MDCK cells, cyst expansion, and morphogenesis/polarization. Cysts formed after 15 days of culture in these hydrogels were analyzed with multiphoton fluorescence microscopy for markers of apical and basolateral membrane domains. Epithelial cysts formed in bioadhesive ligand-functionalized PEG gels exhibited a higher frequency of central lumen and interior apical pole formation as well as basolateral polarization compared to those of unmodified PEG hydrogels. These results demonstrate that incorporation of specific bioadhesive motifs into synthetic hydrogels provides 3D culture environments that support epithelial morphogenesis. These microenvironments provide a flexible and controlled system for systematic investigations into normal and pathologic morphogenic behaviours as well as synthetic environments for promoting tissue morphogenesis for regenerative medicine applications.