The use of tissue engineering to repair large osteochondral defects has been impeded by the limited regenerative capacity of cartilage. Herein, we describe the local release of bone morphogenetic protein 7 (BMP-7) to stimulate the bone marrow-derived progenitors to repair osteochondral defects. BMP-7-releasing poly(d,l-lactide-co-glycolide) (PLGA) matrix was specially designed to retain the dual-function of local BMP-7 release and progenitor-scaffolding with its defect-fitting architecture. To optimize the release kinetics during the repair period, BMP-7/PLGA film was cast on the surface of a cylindrical PLGA matrix. The matrix demonstrated a release profile of BMP-7 in a sustained manner over 28days, maintaining its biological activity. The cylindrical PLGA matrices loaded with BMP-7 were implanted into the osteochondral defects (2mm in diameter, 3mm in depth) in rabbit knees. Histological observations revealed that neo-cartilage generation was completed in a well-integrated morphology with its surrounding normal cartilage and subchondral bone at 12weeks post-implantation. Partial degradation of the PLGA matrix during the repair period guided neo-cartilage formation, which verified the effective scaffolding function of the matrix. Regenerated cartilage in BMP-7-treated defects stained positive for type II collagen and glycosaminoglycan (GAG). Adjacent BMP-7-untreated defects were also repaired with cartilage regeneration, suggesting the effect of local BMP-7 release in the synovial fluid. The BMP-7-unloaded PLGA matrix demonstrated guided cartilage regeneration to a certain extent, whereas the adjacent defects without the matrix revealed only fibrous tissue infiltration. These results indicated that a strategy employing the combined functions of local BMP-7 release and the cell scaffolding of a PLGA matrix might be a potential modality for osteochondral repair.