Endochondral ossification during long bone development and natural fracture healing initiates by mesenchymal cell condensation, directed by local morphogen signals and mechanical cues. Here, we aimed to mimic development for regeneration of large bone defects. We hypothesized that engineered human mesenchymal condensations presenting transforming growth factor-β1 (TGF-β1) and/or bone morphogenetic protein-2 (BMP-2) from encapsulated microparticles promotes endochondral defect regeneration contingent on in vivo mechanical cues. Mesenchymal condensations induced bone formation dependent on morphogen presentation, with BMP-2 + TGF-β1 fully restoring mechanical function. Delayed in vivo ambulatory loading significantly enhanced the bone formation rate in the dual morphogen group. In vitro, BMP-2 or BMP-2 + TGF-β1 initiated robust endochondral lineage commitment. In vivo, however, extensive cartilage formation was evident predominantly in the BMP-2 + TGF-β1 group, enhanced by mechanical loading. Together, this study demonstrates a biomimetic template for recapitulating developmental morphogenic and mechanical cues in vivo for tissue engineering.