Optimal scaffold characteristics are essential for the therapeutic application of engineered tissues. Hydraulic permeability (k) affects many properties of collagen gels, such as mechanical properties, cell-scaffold interactions within three dimensions (3D), oxygen flow and nutrient diffusion. However, the cellular response to 3D gel scaffolds of defined k values has not been investigated. In this study, unconfined plastic compression under increasing load was used to produce collagen gels with increasing solid volume fractions. The Happel model was used to calculate the resulting permeability values in order to study the interaction of k with gel mechanical properties and mesenchymal stem cell (MSC)-induced gel contraction, metabolism and differentiation in both non-osteogenic (basal medium) and osteogenic medium for up to 3 weeks. Collagen gels of fibrillar densities ranging from 0.3 to >4.1 wt.% gave corresponding k values that ranged from 1.00 to 0.03 microm(2). Mechanical testing under compression showed that the collagen scaffold modulus increased with collagen fibrillar density and a decrease in k value. MSC-induced gel contraction decreased as a direct function of decreasing k value. Relative to osteogenic conditions, non-osteogenic MSC cultures exhibited a more than 2-fold increase in gel contraction. MSC metabolic activity increased similarly under both osteogenic and non-osteogenic culture conditions for all levels of plastic compression. Under osteogenic conditions MSC differentiation and mineralization, as indicated by alkaline phosphatase activity and von Kossa staining, respectively, increased in response to an elevation in collagen fibrillar density and decreased gel permeability. In this study, gel scaffolds with higher collagen fibrillar densities and corresponding lower k values provided a greater potential for MSC differentiation and appear most promising for bone grafting purposes. Thus, cell-scaffold interactions can be optimized by defining the 3D properties of collagen scaffolds through k adjustment.