Sustained release polymeric particles containing diclofenac sodium dispersed in Gelucire (R) matrix and encapsulated in calcium alginate shell were prepared with different drug-to-polymer ratios and also with different concentrations of sodium alginate for a fixed drug-to-polymer ratio in an aqueous environment. Spherical particles were formed by dropping an emulsion of diclofenac sodium in Gelucire (R) matrix, emulsified with sodium alginate, into calcium chloride solution. The gelled beads formed by ionotropic gelation of alginate with calcium ions showed sustained release of the water soluble drug in in-vitro release study. Drug release was a function of square-root of time, suggesting a matrix diffusion release pattern. The rate of release was significantly suppressed with increasing proportions of Gelucire (R) in the mixture. Sustained and complete release was achieved with Gelucire (R) of low melting point and low HLB value. No significant drug release occurred in a dissolution medium of pH 1.5, whereas complete release was observed at pH 6.8, consistent with considerable swelling of the alginate gel at this pH.