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Mesenchymal stem cells (MSCs) have shown promise as a therapy for osteoarthritis (OA). However, to date there is no standardized cell dosage, and the mechanism of action of MSCs in OA is still not completely understood. Biomaterials are considered to improve seeded cell function, so we established biocompatible and biodegradable gelatin microcryogels (GMs) as the carrier for umbilical cord–derived MSCs (UCMSCs) in this study. First, we generated UCMSC-GM complexes, optimized the pore size and cell density, and discovered that GMs enhanced cell viability and growth factor secretion, especially epidermal growth factors (EGF), under different biomechanical conditions, which is possibly mediated by tumor necrosis factor-alpha converting enzyme (TACE), a metalloproteinase crucial for EGF mature and release. In addition, Luciferase tracing and GFP fluorescence assay showed that GMs enhanced the retention of UCMSCs in the knee joint of mice. Then, we treated mice with OA knee joints with either low-dose free MSCs (3 × 104 cells), UCMSC-loaded GMs (3 × 104 cells) or high-dose free MSCs (3 × 105 cells), and found that UCMSC-GMs (3 × 104 cells) promoted cartilage regeneration and inhibited macrophage-mediated synovitis better than low-dose free UCMSCs, and achieved a similar effect to that of high-dose (3 × 105 cells) treatment. Further transwell assay showed that GMs promoted chondrocyte anabolism in vitro, which is greatly blocked by Gefitinib, an EGF receptor (EGFR) signalling pathway inhibitor. In conclusion, this study provides evidence that the UCMSC-GM complex exhibited a significantly stronger effect in attenuating OA progression compared to UCMSCs alone even at a low dose, and these results shed light on the clinical application of cell therapy for OA.