In this study, methacrylation of alginate was carried out by reacting sodium alginate with methacrylic anhydride in the presence of sodium hydroxide. Separately synthesized nano-hydroxyapatite (nano-HAp) powder was surface functionalized using mercaptopropionic acid and ethylene glycol methacrylate phosphate (EGMP) in the presence of azobisisobutyronitrile benzene as a free radical initiator in a nitrogen atmosphere. Methacrylated alginate solution was mixed with the required amount of surface-functionalized HAp nanoparticles in the presence of 0.05% Irgacure 2959 as a photoinitiator and was placed at the centre of a 8 kW UV light source (265 nm) to prepare photo-crosslinked bone paste. X-ray diffraction analysis indicated that surface functionalization did not alter phase purity of HAp nanopowder in the prepared paste. The graft polymerization of EGMP on the surface of HAp was confirmed by the presence of the 1732 cm-1 band, which belongs to C=-O stretching of EGMP, in addition to the characteristic peaks of nano-HAp and alginate in the composite paste. The storage and loss moduli of all the prepared pastes increased non-linearly with time up to 100 s, demonstrating their pseudo plastic behaviour. The rate of release of bone morphogenetic protein 2 (BMP-2) was significantly faster in the first few days, and the release curve gradually levelled off prior to slowing down up to 22 d. Mesenchymal stem cell adhesion studies revealed that cells could attach to the paste material and stretch over the surface of the material after 14 d of incubation. MTT assay showed that prepared paste materials were conducive to attachment and proliferation of mesenchymal stem cells. Immunocytochemical analysis revealed that the addition of surface-functionalized nano-HAp and BMP-2 to alginate hydrogel enhanced the osteogenic potential of the prepared paste. The results indicate that the newly developed photo-crosslinked paste may be physically and biologically suitable for application as a bone filler.