The effectiveness of microencapsulation system for targeted delivery of probiotics depends on its ability to protect cells from harsh gastrointestinal conditions of stomach followed by effectively releasing the cells in intestinal conditions. Oppositely charged xanthan and chitosan form stable polyelectrolytic hydrogels capable of encapsulating enzymes and cells. The present study aims at developing an effective microencapsulation system for probiotics by screening and optimizing the factors critical to xanthan-chitosan hydrogel (XCH) capsule formation. The changes in the core pH of the hydrogel capsule in response to simulated gastric juice (SGJ) were characterized. Increase in xanthan concentration and chitosan molecular weight improved the barrier properties, however, increasing complexation time beyond 40 min had the opposite effect. Increase in molecular weight of chitosan resulted in improved viability of probiotic bacteria, Lactobacillus acidophilus, after SGJ treatment, which could be attributed to the differences in hydrogel membrane thickness at the surface of capsule, as evidenced by scanning electron micrographs (SEM). Introducing XCH capsules made with high molecular weight (HMW) chitosan into xanthan solution resulted in the formation of xanthan-chitosan-xanthan hydrogel (XCXH) capsules. Unlike HMW and medium molecular weight (MMW) chitosan, low molecular weight (LMW) chitosan did not form the outer layer beyond XCH, suggesting the significance of chitosan molecular weight in the formation of XCXH. The increased hydrogel thickness of XCXH capsules formed with HMW chitosan compared to XCH capsules rendered better retention of cells in SGJ treatment for a longer period of time, further suggesting the importance of membrane thickness on the hydrogel stability and its barrier properties. Furthermore, complete release of cells from XCXH in simulated intestinal fluid (SIF) was extended by approximately an hour compared to XCH capsules. Smaller, nozzle-sprayed XCXH capsules using HMW chitosan protected probiotic bacteria in SGJ albeit one-log reduction in its protective efficacy compared to syringe extruded capsules. When incorporated into stirred yogurt, XCXH microcapsules improved the viability of L. acidophilus by ~1 log CFU/ml between 15 and 30 days of storage. The stability of bacteria against bile salts was significantly improved, enabling the delivery of prescribed number of cells to attain the claimed health benefits.