Immobilization is a key technology that improves the operational stability of enzymes. In this study, alginate-gelatin (Alg-Gel) hydrogel matrix was synthesized and used as immobilization support for Mucor racemosus lipase (Lip). Enzyme catalyzed ultrasound-assisted hydrolysis of olive oil was also investigated. Alg-Gel matrix exhibited high entrapment efficiency (94.5%) with a degradation rate of 42% after 30 days. The hydrolysis of olive oil using Alg-Gel-Lip increased significantly (P < 0.05) as compared to free Lip. Optimum pH and temperature were determined as pH 5.0 and 40 °C, respectively. The Vmax values for free and immobilized Lip were determined to be 5.5 mM and 5.8 mM oleic acid/min/ml, respectively, and the Km values were 2.2 and 2.58 mM/ml respectively. Thermal stability was highly improved for Alg-Gel-Lip (t1/2 650 min and Ed 87.96 kJ/mol) over free Lip (t1/2 150 min and Ed 23.36 kJ/mol). The enzymatic activity of Alg-Gel-Lip was preserved at 96% after four consecutive cycles and 90% of the initial activity after storage for 60 days at 4 °C. Alg-Gel-Lip catalyzed olive oil hydrolysis using ultrasound showed a significant (P < 0.05) increase in hydrolysis rate compared to free Lip (from 0.0 to 58.2%, within the first 2 h). In contrast to traditional methodology, using ultrasonic improved temperature-dependent enzymatic catalyzed reactions and delivered greater reaction yields. Results suggest that Alg-Gel-Lip biocatalyst has great industrial application potential, particularly for free fatty acid production. In addition, the combined use of enzyme and ultrasound has the potential of eco-friendly technology.