Methoxy poly(ethylene glycol)-grafted-chitosan (mPEG-g-CS) was synthesized in an attempt to increase the water solubility of CS, and it was applied as wall material to microcapsulate algal oil (AO). Both Fourier transformed-infrared (FT-IR) spectra and solubility test confirmed that mPEG had been successfully grafted onto CS. The larger particles showed smooth surfaces, whereas smaller ones presented surface folds. The amount of free and total oil were 2.73 and 47.87 g/100 g, respectively, with high encapsulation efficiency of 94.30%. Fourteen fatty acids were detected in free algal oil (FAO) and microcapsulated algal oil (MAO), and the important fatty acids were preserved after microcapsulation. AO contained within microcapsules was protected from UV-light and heat compared with FAO. Release rate of AO was initially rapid and then followed by controlled release with the erosion mechanism playing a dominant role. The mPEG-g-CS proved to be a promising wall material with excellent solubility and film forming ability, and therefore supplied great potential applications in food industry. Crown Copyright (C) 2010 Published by Elsevier Ltd. All rights reserved.