In this research we have used different cytokines and progesterone to enhance the immunomodulatory capacity of placental-derived stem cells (PLSCs) prior to their encapsulation. We assessed the effect of microencapsulation of the cells without (control) or after 3-day treatment with interferon gamma (INFγ), interleukin10 (IL-10), or progesterone (P4). Treated PLSCs demonstrated strong immunosuppressive effects on phytohemagglutinin (PHA)-activated peripheral blood mononuclear cells (PBMNCs). INFγ treatment resulted in the strongest immune inhibition among the treated groups. The treatments enhanced soluble human leukocyte antigen (sHLAG) secretion compared to control. The IL-10-treated group showed the highest effect on HLAG secretion compared to other groups. Alginate encapsulation of PLSCs did not affect cell viability, or sHLAG secretion. Also, after treatment the encapsulated PLSCs inhibited PHA-activated PBMNCs in the same manner as unencapsulated cells. We studied two groups of encapsulated PLSCs, one without perm-selective poly-l-ornithine (PLO)-coating and the other with PLO-coating, and measured levels of sHLAG secreted. We found no difference in sHLAG secretion between both groups. In summary, our data show that immunomodulatory function of the PLSC is not affected by encapsulation. These findings provide good promise for potential use of encapsulated PLSCs for immunomodulation treatment of disease by stem cell therapy.