Segmental bone defect repair remains a clinical and experimental challenge in tissue engineering with increasing focus on angiogenesis in the bone substitutes. The objective of this study was to investigate the osteogenic effects of angiopoietin‐1 (Ang‐1) gene transfected bone marrow‐derived mesenchymal stem cells (MSCs) seeded on porous β‐TCP scaffolds. This bone substitute (experimental group) and MSCs/β‐TCP compounds (control group) were implanted into 15 mm segmental bone defects of the radii of 30 New Zealand white rabbits, with platelet‐rich plasma injected at the same time. Bone regeneration and angiogenesis were assessed by Scanning electron microscope (SEM), X‐ray, histology, immunohistology, and biomechanical outcome measurements made on the 2nd, 4th, 8th, and 12th week after the operation. In vitro, the amount of proliferation and differentiation of Ang‐1 gene transfected MSCs was found to be gross increased than that of the control groups. In vivo, a significantly increased amount of new bone formation accompanied by active capillary vasculature regeneration was observed in the pores of the scaffolds which had been seeded with Ang‐1 gene transfected MSCs, as compared with the control groups. The biomechanical test confirmed the failure load of new born bone was close to normal bone. These results suggest that transfer of gene encoding Ang‐1 to MSCs increases their osteogenic properties by enhancing capillary regeneration, thus providing a rich blood supply for new bone formation in segmental bone defects. © 2012 Wiley Periodicals, Inc. J Biomed Mater Res Part B: Appl Biomater , 2012.