The swelling behavior of the structural material of cell‐enclosing capsules is a key factor for the successful transplantation of these capsules in the treatment of diseases. The present study aimed to develop cell‐enclosing capsules displaying minimal swelling under physiological conditions. We investigated the use of an alginate–tyramine conjugate synthesized by a carbodiimide/active‐ester coupling reaction. The conjugate gel crosslinked by calcium ions and peroxidase‐catalyzed oxidative coupling of phenols swelled less in saline than in unmodified alginate. The degree of swelling could be controlled by conjugate preparation conditions. The conjugate gel showed no obvious cytotoxicity for cells, including the process of oxidative coupling generation. Further, encapsulated cells could be cultured for up to 2 months and achieve ∼5.2‐fold greater mitochondrial activity after 51 days of encapsulation than after 1 day. These results show that this alginate–tyramine conjugate is a promising material for use in cell‐enclosing capsules for cell therapy. © 2007 Wiley Periodicals, Inc. J Biomed Mater Res, 2008