The clinical standard therapy for large bone defects, typically addressed through autograft or allograft donor tissue, faces significant limitations. Tissue engineering offers a promising alternative strategy for the regeneration of substantial bone lesions. In this study, we harnessed poly(ethylene glycol) (PEG)-based hydrogels, optimizing critical parameters including stiffness, incorporation of arginine-glycine-aspartic acid (RGD) cell adhesion motifs, degradability, and the release of BMP2 to promote bone formation. In vitro we demonstrated that human bone marrow derived stromal cell (hBMSC) proliferation and spreading strongly correlates with hydrogel stiffness and adhesion to RGD peptide motifs. Moreover, the incorporation of the osteogenic growth factor BMP2 into the hydrogels enabled sustained release, effectively inducing bone regeneration in encapsulated progenitor cells. When used in vivo to treat calvarial defects in rats, we showed that hydrogels of low and intermediate stiffness optimally facilitated cell migration, proliferation, and differentiation promoting the efficient repair of bone defects. Our comprehensive in vitro and in vivo findings collectively suggest that the developed hydrogels hold significant promise for clinical translation for bone repair and regeneration by delivering sustained and controlled stimuli from active signaling molecules.