Our objective was to test the hypothesis that self-assembling peptide hydrogel scaffolds provide cues that enhance the chondrogenic differentiation of bone marrow stromal cells (BMSCs). BMSCs were encapsulated within two unique peptide hydrogel sequences, and chondrogenesis was compared with that in agarose hydrogels. BMSCs in all three hydrogels underwent transforming growth factor-beta1-mediated chondrogenesis as demonstrated by comparable gene expression and biosynthesis of extracellular matrix molecules. Expression of an osteogenic marker was unchanged, and an adipogenic marker was suppressed by transforming growth factor-beta1 in all hydrogels. Cell proliferation occurred only in the peptide hydrogels, not in agarose, resulting in higher glycosaminoglycan content and more spatially uniform proteoglycan and collagen type II deposition. The G1-positive aggrecan produced in peptide hydrogels was predominantly the full-length species, whereas that in agarose was predominantly the aggrecanase product G1-NITEGE. Unique cell morphologies were observed for BMSCs in each peptide hydrogel sequence, with extensive cell-cell contact present for both, whereas BMSCs in agarose remained rounded over 21 days in culture. Differences in cell morphology within the two peptide scaffolds may be related to sequence-specific cell adhesion. Taken together, this study demonstrates that self-assembling peptide hydrogels enhance chondrogenesis compared with agarose as shown by extracellular matrix production, DNA content, and aggrecan molecular structure.