The use of tissue grafting for the repair of large bone defects has numerous limitations including donor site morbidity and the risk of disease transmission. These limitations have prompted research efforts to investigate the effects of combining biomaterial scaffolds with biochemical cues to augment bone repair. The goal of this study was to use a critically-sized rat femoral segmental defect model to investigate the efficacy of a delivery system consisting of an electrospun polycaprolactone (PCL) nanofiber mesh tube with a silk fibroin hydrogel for local recombinant bone morphogenetic protein 2 (BMP-2) delivery. Bilateral 8 mm segmental femoral defects were formed in 13-week-old Sprague Dawley rats. Perforated electrospun PCL nanofiber mesh tubes were fitted into the adjacent native bone such that the lumen of the tubes contained the defect (Kolambkar et al., 2011b). Silk hydrogels with or without BMP-2 were injected into the defect. Bone regeneration was longitudinally assessed using 2D X-ray radiography and 3D microcomputed topography (μCT). Following sacrifice at 12 weeks after surgery, the extracted femurs were either subjected to biomechanical testing or assigned for histology. The results demonstrated that silk was an effective carrier for BMP-2. Compared to the delivery system without BMP-2, the delivery system that contained BMP-2 resulted in more bone formation (p < 0.05) at 4, 8, 12 weeks after surgery. Biomechanical properties were also significantly improved in the presence of BMP-2 (p < 0.05) and were comparable to age-matched intact femurs. Histological evaluation of the defect region indicated that the silk hydrogel has been completely degraded by the end of the study. Based on these results, we conclude that a BMP-2 delivery system consisting of an electrospun PCL nanofiber mesh tube with a silk hydrogel presents an effective strategy for functional repair of large bone defects.