The efficacy of cell-based therapies as an alternative to autologous bone grafts requires biomaterials to localize cells at the defect and drive osteogenic differentiation. Hydrogels are ideal cell delivery vehicles that can provide instructional cues via their composition or mechanical properties but commonly lack osteoconductive components that nucleate mineral. To address this challenge, we entrapped mesenchymal stromal cells (MSCs) in a composite hydrogel based on two naturally-derived polymers (alginate and hyaluronate) containing biomineralized polymeric microspheres. Mechanical properties of the hydrogels were dependent upon composition. The presentation of the adhesive tripeptide Arginine-Glycine-Aspartic Acid (RGD) from both polymers induced greater osteogenic differentiation of ovine MSCs in vitro compared to gels formed of RGD-alginate or RGD-alginate/hyaluronate alone. We then evaluated the capacity of this construct to stimulate bone healing when transplanting autologous, culture-expanded MSCs into a surgical induced, critical-sized ovine iliac crest bone defect. At 12 weeks post-implantation, defects treated with MSCs transplanted in composite gels exhibited significant increases in blood vessel density, osteoid formation, and bone formation compared to acellular gels or untreated defects. These findings demonstrate the capacity of osteoconductive hydrogels to promote bone formation with autologous MSCs in a large animal bone defect model and provide a promising vehicle for cell-based therapies of bone healing.