Repair of cartilage due to joint trauma remains challenging due to the poor healing capacity of cartilage and adverse effects related to current growth factor-based strategies. NELL-1 (Nel-like molecule-1; Nel [a protein strongly expressed in neural tissue encoding epidermal growth factor like domain]), a protein first characterized in the context of premature cranial suture fusion, is believed to accelerate differentiation along the osteochondral lineage. We previously demonstrated the ability of NELL-1 protein to maintain the cartilaginous phenotype of explanted rabbit chondrocytes in vitro. Our objective in the current study is to determine whether NELL-1 can affect endogenous chondrocytes in an in vivo cartilage defect model. To generate the implant, NELL-1 was incorporated into chitosan nanoparticles and embedded into alginate hydrogels. These implants were press fit into 3-mm circular osteochondral defects created in the femoral condylar cartilage of 3-month-old New Zealand White rabbits (n=10). Controls included unfilled defects (n=8) and defects filled with phosphate-buffered saline-loaded chitosan nanoparticles embedded in alginate hydrogels (n=8). Rabbits were sacrificed 3 months postimplantation for histological analysis. Defects filled with alginate containing NELL-1 demonstrated significantly improved cartilage regeneration. Remarkably, histology of NELL-1-treated defects closely resembled that of native cartilage, including stronger Alcian blue and Safranin-O staining and increased deposition of type II collagen and absence of the bone markers type I collagen and Runt-related transcription factor 2 (Runx2) as demonstrated by immunohistochemistry. Our results suggest that NELL-1 may produce functional cartilage with properties similar to native cartilage, and is an exciting candidate for tissue engineering-based approaches for treating diverse pathologies of cartilage defects and degeneration.