The aim of the study was to produce a novel porous gelatin-chondroitin-hyaluronate scaffold in combination with a controlled release of transforming growth factor beta1 (TGF-beta1), which induced the differentiation of mesenchymal stem cells (MSCs) in vivo for enhancing cartilage repair. Gelatin microspheres loaded with TGF-beta1 (MS-TGFbeta1) showed a fast release at the initial phase (37.4%), and the ultimate accumulated release was 83.1% by day 18. The autologous MSCs seeded on MS-TGFbeta1/scaffold were implanted to repair full-thickness cartilage defects in rabbits as in vivo differentiation repair group, while MSCs differentiated in vitro were seeded on scaffold without MS-TGFbeta1 to repair the contra lateral cartilage defects (n = 30). Fifteen additional rabbits without treatment for defects were used as control. Histology observation showed that the in vivo differentiation repair group had better chondrocyte morphology, integration, continuous subchondral bone, and much thicker newly formed cartilage layer when compared to in vitro differentiation repair group 12 and 24 weeks, postoperatively. There was a significant difference in histological grading score between these two experimental groups, and both showed much better repair than that of the control. The present study implied that the novel scaffold with MS-TGFbeta1 might serve as a new way to induce the differentiation of MSCs in vivo to enhance the cartilage repair.