A bone morphogenetic protein-7 (BMP-7, also known as osteogenic protein 1 or OP-1) delivery system for potential de novo bone tissue regeneration and acceleration in distraction osteogenesis (DO) is presented. A liposomal core was incorporated in a shell of alternating layer-by-layer (L-b-L) self-assembled natural polyelectrolytes; alginate and chitosan. Hydrophilic, non-toxic, monodisperse, spherical and stable cationic capsules with an extended shelf-life allowing immediate protein loading prior to clinical administration were formulated. Protein encapsulation and release from the nanocapsules can be modulated by modifying the number of polymer layers assembled on the liposomal core. Controlled, triphasic, linear and sustained release of bioactive OP-1 was observed, demonstrating the core-shell effect, in vitro. In vivo, un-loaded and OP-1 loaded nanocapsules were evaluated in a rabbit model of tibial DO. Regenerate structure analysis followed. Osteogenesis and consolidation were accelerated via a single injection of the core-shell nanocapsules loaded with a dose of no more than 1.0 μg OP-1 accentuating further the role of the hybrid nanocapsules. Hence, a promising and cost-effective carrier for the localized and release-controlled administration of therapeutic growth factors has been formulated.