Implantation of microencapsulated engineered cells secreting molecules with antineoplastic properties into tumors is a novel approach to cancer gene therapy. In this study, we constructed an engineered tumor cell line, VkCk/RM4-TNF-alpha, which secreted RM4/TNF-alpha fusion protein containing the chimeric antitumor antibody, F(ab')2 (RM4), recognizing the tumor antigen TAG72, as well as the TNF-alpha moiety. The engineered cells were encapsulated into microencapsules. The RM4/TNF-alpha fusion protein secreted by encapsulated VkCk/RM4-TNF-alpha cells could be diffused through the microencapsule membrane into the supernatant and exert a cytotoxic effect on L929 cells in vitro. The antigen-specific binding-reactivity of RM4/TNF-alpha for the TAG72 antigen was confirmed by immunohistochemical staining of rat LMCR tumor cells which expressed TAG72 antigen. Implantation of microencapsules containing VkCk/RM4-TNF-alpha cells into LMCR tumors in rats induced tumor regression as a result of tumor necrosis formation. Taken together, these data suggest that microencapsulation of recombinant tumor cells secreting antibody/cytokine fusion protein might be an alternative approach in the treatment of cancers.