We demonstrate formation of a hydrogel network by cross-linking functionalized poly(ethylene glycol) (PEG) and a lysine-containing polypeptide through the action of a natural tissue enzyme, transglutaminase. The enzyme reaction rate using a PEG-modified peptide substrate is the same as the reaction rate for free Substrate. Both the ratio and total concentration of the two macromers determine whether gelation will occur and the nature of the gel which forms. Under suitable conditions, clear gels form and swell to give a final composition which is 90% water, Diffusion coefficients of small proteins and albumin in the gel are comparable to those in free solution. Gelation proceeds under mild conditions and thus these gels hold potential for forming highly hydrated networks around living cells.