Bone tissue engineering approaches increasingly focus on the use of mesenchymal stem cells (MSC). In most animal transplantation models MSC are isolated and expanded before auto cell transplantation which might be critical for clinical application in the future. Hence this study compares the potential of directly auto-transplanted versus in vitro expanded MSC with or without bone morphogenetic protein-2 (BMP-2) to induce bone formation in a large volume ceramic bone substitute in the sheep model. MSC were isolated from bone marrow aspirates and directly auto-transplanted or expanded in vitro and characterized using fluorescence activated cell sorting (FACS) and RT-PCR analysis before subcutaneous implantation in combination with BMP-2 and β-tricalcium phosphate/hydroxyapatite (β-TCP/HA) granules. Constructs were explanted after 1 to 12 weeks followed by histological and RT-PCR evaluation. Sheep MSC were CD29⁺, CD44⁺ and CD166⁺ after selection by Ficoll gradient centrifugation, while directly auto-transplanted MSC-populations expressed CD29 and CD166 at lower levels. Both, directly auto-transplanted and expanded MSC, were constantly proliferating and had a decreasing apoptosis over time in vivo. Directly auto-transplanted MSC led to de novo bone formation in a heterotopic sheep model using a β-TCP/HA matrix comparable to the application of 60 μg/ml BMP-2 only or implantation of expanded MSC. Bone matrix proteins were up-regulated in constructs following direct auto-transplantation and in expanded MSC as well as in BMP-2 constructs. Up-regulation was detected using immunohistology methods and RT-PCR. Dense vascularization was demonstrated by CD31 immunohistology staining in all three groups. Ectopic bone could be generated using directly auto-transplanted or expanded MSC with β-TCP/HA granules alone. Hence BMP-2 stimulation might become dispensable in the future, thus providing an attractive, clinically feasible approach to bone tissue engineering.