We developed an injectable hydrogel system with a sustained release of TGF-β3 through growth factor-loaded microsphere to mimic the cartilage-like microenvironment. Poly(lactic-co-glycolic acid) (PLGA) microspheres incorporated in three dimensional (3D) scaffolds were chosen because of its regulatory approval, good biodegradability, and acting as carriers with sustained release behavior. We evaluated sustained release of TGF-β3 by PLGA microspheres encapsulated in methoxy poly(ethylene glycol)-poly(alanine) (mPA) hydrogels and the resulting enhanced chondrogenic effects. We reported here the effect of the proposed system for sustained release of growth factors on chondrogenesis in cartilage regeneration. PLGA microspheres were used in our thermosensitive mPA hydrogel system with bovine serum albumin as a stabilizing and protecting agent for the emulsion and TGF-β3 enabling sustained release. Gelation, structural properties, and in-vitro release of this composite, that is, microspheres in hydrogel, system were investigated. Using PLGA microspheres to carry growth factors could complement the mPA hydrogel's ability to provide an excellent 3D microenvironment for the promotion of chondrogenic phenotype as compared the systems using mPA hydrogel or microspheres alone. Our study demonstrated that this synthesized composite hydrogel system is capable of modulating the biosynthetic and differentiation activities of chondrocytes. The sustained release of TGF-β3 in this novel hydrogel system could improve biomedical applicability of mPEG-polypeptide scaffolds. The distinctive local growth factor delivery system successfully combined the use of both polymers to be a suitable candidate for prolonged articular cartilage regeneration.