In this paper, we describe the fabrication of a new biodegradable porous scaffold composed of polycaprolactone (PCL) and magnesium (Mg) micro-particles. The compressive modulus of PCL porous scaffold was increased to at least 150% by incorporating 29% Mg particles with the porosity of 74% using Micro-CT analysis. Surprisingly, the compressive modulus of this scaffold was further increased to at least 236% when the silane-coupled Mg particles were added. In terms of cell viability, the scaffold modified with Mg particles significantly convinced the attachment and growth of osteoblasts as compared with the pure PCL scaffold. In addition, the hybrid scaffold was able to attract the formation of apatite layer over its surface after 7 days of immersion in normal culture medium, whereas it was not observed on the pure PCL scaffold. This in vitro result indicated the enhanced bioactivity of the modified scaffold. Moreover, enhanced bone forming ability was also observed in the rat model after 3 months of implantation. Though bony in-growth was found in all the implanted scaffolds. High volume of new bone formation could be found in the Mg/PCL hybrid scaffolds when compared to the pure PCL scaffold. Both pure PCL and Mg/PCL hybrid scaffolds were degraded after 3 months. However, no tissue inflammation was observed. In conclusion, these promising results suggested that the incorporation of Mg micro-particles into PCL porous scaffold could significantly enhance its mechanical and biological properties. This modified porous bio-scaffold may potentially apply in the surgical management of large bone defect fixation.