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Reconstruction of large bone defects is limited by insufficient vascularization and slow bone regeneration. The objective of this work was to investigate the effect of spatial and temporal release of recombinant human bone morphogenetic protein-2 (BMP2) and vascular endothelial growth factor (VEGF) on the extent of osteogenic and vasculogenic differentiation of human mesenchymal stem cells (hMSCs) and endothelial colony-forming cells (ECFCs) encapsulated in a patterned hydrogel. Nanogels (NGs) based on polyethylene glycol (PEG) macromers chain-extended with short lactide (L) and glycolide (G) segments were used for grafting and timed-release of BMP2 and VEGF. NGs with 12 kDa PEG molecular weight (MW), 24 LG segment length, and 60/40 L/G ratio (P12-II, NG(10)) released the grafted VEGF in 10 days. NGs with 8 kDa PEG MW, 26 LG segment length, and 60/40 L/G ratio (P8-I, NG(21)) released the grafted BMP2 in 21 days. hMSCs and NG-BMP2 were encapsulated in a patterned matrix based on acrylate-functionalized lactide-chain-extended star polyethylene glycol (SPELA) hydrogel and microchannel patterns filled with a suspension of hMSCs + ECFCs and NG-VEGF in a crosslinked gelatin methacryloyl (GelMA) hydrogel. Groups included patterned constructs without BMP2/VEGF (None), with directly added BMP2/VEGF, and NG-BMP2/NG-VEGF. Based on the results, timed-release of VEGF in the microchannels in 10 days from NG(10) and BMP2 in the matrix in 21 days from NG(21) resulted in highest extent of osteogenic and vasculogenic differentiation of the encapsulated hMSCs and ECFCs compared to direct addition of VEGF and BMP2. Further, timed-release of VEGF from NG(10) in hMSC + ECFC encapsulating microchannels and BMP2 from NG(21) in hMSC encapsulating matrix sharply increased bFGF expression in the patterned constructs. The results suggest that mineralization and vascularization are coupled by localized secretion of paracrine signaling factors by the differentiating hMSCs and ECFCs.Differentiation of ECFCs+hMSCs by timed-release of VEGF+BMP2 in a patterned gel leads to paracrine signaling and vascularized osteogenesis.