Hypoxic injury of islets is a major obstacle for encapsulated islet transplantation into the peritoneal cavity. To improve oxygen delivery to encapsulated islets, we integrated 20% of the oxygen carrier material, perfluorodecalin (PFD), in alginate capsules mixed with islets (PFD-alginate). Integration of PFD clearly improved islet viability and decreased reactive oxygen species production compared to islets encapsulated with alginate only (alginate) and naked islets exposed to hypoxia in vitro. In PFD-alginate capsules, HIF-1α expression was minimal, and insulin expression was well maintained. Furthermore, the best islet function represented by glucose-stimulated insulin secretion was observed for the PFD-alginate capsules in hypoxic condition. For the in vivo study, the same number of naked islets and encapsulated islets (alginate and PFD-alginate) was transplanted into streptozotocin-induced diabetic mice. Non-fasting blood glucose levels and the area under the curve for glucose based on intraperitoneal glucose tolerance tests in the PFD-alginate group were lower than in the alginate group. The harvested islets stained positive for insulin in all groups, but the ratio of dead cell area was 4 times higher in the alginate group than in the PFD-alginate group. In conclusion, integration of PFD in alginate microcapsules improved islet function and survival by minimizing the hypoxic damage of islets after intraperitoneal transplantation.