For tissue engineering applications, scaffolds should be porous to enable rapid nutrient and oxygen transfer while providing a three-dimensional (3D) microenvironment for the encapsulated cells. This dual characteristic can be achieved by fabrication of porous hydrogels that contain encapsulated cells. In this work, we developed a simple method that allows cell encapsulation and pore generation inside alginate hydrogels simultaneously. Gelatin beads of 150-300 microm diameter were used as a sacrificial porogen for generating pores within cell-laden hydrogels. Gelation of gelatin at low temperature (4 degrees C) was used to form beads without chemical crosslinking and their subsequent dissolution after cell encapsulation led to generation of pores within cell-laden hydrogels. The pore size and porosity of the scaffolds were controlled by the gelatin bead size and their volume ratio, respectively. Fabricated hydrogels were characterized for their internal microarchitecture, mechanical properties and permeability. Hydrogels exhibited a high degree of porosity with increasing gelatin bead content in contrast to nonporous alginate hydrogel. Furthermore, permeability increased by two to three orders while compressive modulus decreased with increasing porosity of the scaffolds. Application of these scaffolds for tissue engineering was tested by encapsulation of hepatocarcinoma cell line (HepG2). All the scaffolds showed similar cell viability; however, cell proliferation was enhanced under porous conditions. Furthermore, porous alginate hydrogels resulted in formation of larger spheroids and higher albumin secretion compared to nonporous conditions. These data suggest that porous alginate hydrogels may have provided a better environment for cell proliferation and albumin production. This may be due to the enhanced mass transfer of nutrients, oxygen and waste removal, which is potentially beneficial for tissue engineering and regenerative medicine applications.