Xenotransplantation of microencapsulated fetal pig islet-like cell clusters (FP ICCs) offers a potential cellular therapy for type 1 diabetes. Although microcapsules prevent direct contact of the host immune system with the xenografted tissue, poor graft survival is still an issue. This study aimed to characterise the nature of the host immune cells present on the engrafted microcapsules and effects on encapsulated FP ICCs that were transplanted into immunocompetent mice. Encapsulated FP ICCs were transplanted into the peritoneal cavity of C57BL/6 mice. Grafts retrieved at days 1, 3, 7, 14 and 21 post-transplantation were analysed for pericapsular fibrotic overgrowth (PFO), cell viability, intragraft porcine gene expression, macrophages, myofibroblasts and intraperitoneal murine cytokines. Graft function was assessed ex vivo by insulin secretion studies. Xenogeneic immune response to encapsulated FP ICCs was associated with enhanced intragraft mRNA expression of porcine antigens MIP-1alpha, IL-8, HMGB1 and HSP90 seen within the first two weeks post-transplantation. This was associated with the recruitment of host macrophages, infiltration of myofibroblasts and collagen deposition leading to PFO which was evident from day 7 post-transplantation. This was accompanied by a decrease in cell viability and loss of FP ICC architecture. The only pro-inflammatory cytokine detected in the murine peritoneal flushing was TNF-alpha with levels peaking at day 7 post transplantation. This correlated with the onset of PFO at day 7 implying activated macrophages as its source. The anti-inflammatory cytokines detected were IL-5 and IL-4 with levels peaking at days 1 and 7, respectively. Porcine C-peptide was undetectable at all time points post-transplantation. PFO was absent and murine intraperitoneal cytokines were undetectable when empty microcapsules were transplanted. In conclusion, this study demonstrated that the macrophages are direct effectors of the xenogeneic immune response to encapsulated FP ICCs leading to PFO mediated by a combination of both pro- and anti-inflammatory cytokines.