The regeneration of hyaline articular cartilage remains a major challenge due to the limited potential for cartilage to self-repair. Mesenchymal stem cell and hydrogel scaffold-based cartilage tissue engineering is a promising technique for articular cartilage therapy. The purpose of this study was to investigate the use of rabbit synovial fluid mesenchymal stem cells (rbSF-MSCs) encapsulated in an injectable chitosan-based hydrogel to repair full-thickness cartilage defects in femoral patellar grooves in rabbits. The rbSF-MSCs were obtained from rabbit synovial fluid and the surface markers of rbSF-MSCs were coincidental to the identification criteria of MSCs according to flow cytometry. The rbSF-MSCs were able to differentiate into osteogenic, adipogenic and chondrogenic lineages. In the present study, rbSF-MSCs encapsulated in glycol chitosan (GC) and benzaldehyde capped poly (ethylene oxide) (OHC-PEO-CHO) hydrogel were introduced into rabbits to repair articular cartilage defects. The modulus of the hydrogel could be regulated by the concentrations of GC and OHC-PEO-CHO and the hydrogel has a good biocompatibility to rbSF-MSCs. Assessment of in vivo repair indicates using hydrogel/rbSF-MSCs was superior to using the hydrogel scaffold only and the untreated control based on gross appearance and histological grading and evaluation. These preliminary findings suggest using the injectable chitosan-based hydrogel as a scaffold and rbSF-MSCs as seed cells is an alternative for tissue engineering of in vivo treatments for cartilage defects and these rbSF-MSCs allografts may be promising for use in clinical applications.