Staphylococcus aureus is the most common pathogen associated with bacterial infections in orthopedic procedures. Infections often lead to implant failure and subsequent removal, motivating the development of bifunctional materials that both promote repair and prevent failure due to infection. Lysostaphin is an anti-staphylococcal enzyme resulting in bacterial lysis and biofilm reduction. Lysostaphin use is limited by the lack of effective delivery methods to provide sustained, high doses of enzyme to infection sites. We engineered a BMP-2-loaded lysostaphin-delivering hydrogel that simultaneously prevents S. aureus infection and repairs nonhealing segmental bone defects in the murine radius. Lysostaphin-delivering hydrogels eradicated S. aureus infection and resulted in mechanically competent bone. Cytokine and immune cell profiling demonstrated that lysostaphin-delivering hydrogels restored the local inflammatory environment to that of a sterile injury. These results show that BMP-2-loaded lysostaphin-delivering hydrogel therapy effectively eliminates S. aureus infection while simultaneously regenerating functional bone resulting in defect healing.