The release of the anti-inflammatory agent dexamethasone (DEX) from nanoparticles of poly(lactic-co-glycolic acid) (PLGA) embedded in alginate hydrogel (HG) matrices was investigated. DEX-loaded PLGA nanoparticles were prepared using a solvent evaporation technique and were characterized for size, drug loading, and in-vitro release. The crosslinking density of the HG was studied and correlated with drug release kinetics. The amount of DEX loaded in the nanoparticles was estimated as ∼13wt%. The typical particle size ranged from 400 to 600nm. The in-vitro release of DEX from NPs entrapped in the HG showed that 90% of the drug was released over 2 weeks. The impedance of the NP-loaded HG coatings on microfabricated neural probes was measured and found to be similar to the unmodified and uncoated probes. The in-vivo impedance of chronically implanted electrodes loaded with DEX was maintained at its initial level, while that of the control electrode increased by 3 times after about 2 weeks after implantation until it stabilized at approximately 3MΩ. This improvement in performance is presumably due to the reduced amount of glial inflammation in the immediate vicinity of the DEX-modified neural probe.