A major hurdle to surmount in bone-tissue engineering is ensuring a sufficient oxygen supply to newly forming tissue to avoid cell death or delayed development of osteogenic features. We hypothesized that an oxygen-enriched hydrogel scaffold would enhance tissue-engineered bone formation in vivo. To test this, we used a well-characterized mesenchymal stem cell (MSC) line, Tet-off BMP2 MSC, whose cells were engineered to express recombinant human bone morphogenetic protein-2. Cells were suspended in hydrogel supplemented with perfluorotributylamine (PFTBA) and implanted subcutaneously in an ectopic site, a radial bone defect, or a lumbar paravertebral muscle (mouse model of spinal fusion) in C3H/HeN mice. For controls, we used cells suspended in the same gel without PFTBA. In the ectopic site, there were significant increases in bone formation (2.5-fold increase), cell survival, and osteocalcin activity in the PFTBA-supplemented groups. PFTBA supplementation significantly increased structural parameters of bone in radial bone defects and triggered a significant 1.4-fold increase in bone volume in the spinal fusion model. We conclude that synthetic oxygen carrier supplementation of tissue-engineered implants enhances ectopic bone formation and yields better bone quality and volume in bone-repair and spinal fusion models, probably due to increased cell survival.