The native extracellular matrix (ECM) contains a host of matricellular proteins and bioactive factors that regulate cell behavior, and many ECM components have been leveraged to guide cell fate. However, the large size and chemical characteristics of these constituents complicate their incorporation into biomaterials without interfering with material properties, motivating the need for alternative approaches to regulate cellular responses. Mesenchymal stromal cells (MSCs) can promote osseous regeneration in vivo directly or indirectly through multiple means including (1) secretion of proangiogenic and mitogenic factors to initiate formation of a vascular template and recruit host cells into the tissue site or (2) direct differentiation into osteoblasts. As MSC behavior is influenced by the properties of engineered hydrogels, we hypothesized that the biochemical and biophysical properties of alginate could be manipulated to promote the dual contributions of encapsulated MSCs toward bone formation. We functionalized alginate with QK peptide to enhance proangiogenic factor secretion and RGD to promote adhesion, while biomechanical-mediated osteogenic cues were controlled by modulating viscoelastic properties of the alginate substrate. A 1:1 ratio of QK:RGD resulted in the highest levels of both proangiogenic factor secretion and mineralization in vitro. Viscoelastic alginate outperformed purely elastic gels in both categories, and this effect was enhanced by stiffness up to 20 kPa. Furthermore, viscoelastic constructs promoted vessel infiltration and bone regeneration in a rat calvarial defect over 12 weeks. These data suggest that modulating viscoelastic properties of biomaterials, in conjunction with dual peptide functionalization, can simultaneously enhance multiple aspects of MSC regenerative potential and improve neovascularization of engineered tissues.