Background Two major hurdles for successful production of second-generation bioethanol are the presence of inhibitory compounds in lignocellulosic media, and the fact that Saccharomyces cerevisiae cannot naturally utilise pentoses. There are recombinant yeast strains that address both of these issues, but co-utilisation of glucose and xylose is still an issue that needs to be resolved. A non-recombinant way to increase yeast tolerance to hydrolysates is by encapsulation of the yeast. This can be explained by concentration gradients occuring in the cell pellet inside the capsule. In the current study, we hypothesised that encapsulation might also lead to improved simultaneous utilisation of hexoses and pentoses because of such sugar concentration gradients. Results In silico simulations of encapsulated yeast showed that the presence of concentration gradients of inhibitors can explain the improved inhibitor tolerance of encapsulated yeast. Simulations also showed pronounced concentration gradients of sugars, which resulted in simultaneous xylose and glucose consumption and a steady state xylose consumption rate up to 220-fold higher than that found in suspension culture. To validate the results experimentally, a xylose-utilising S. cerevisiae strain, CEN.PK XXX, was constructed and encapsulated in semi-permeable alginate-chitosan liquid core gel capsules. In defined media, encapsulation not only increased the tolerance of the yeast to inhibitors, but also promoted simultaneous utilisation of glucose and xylose. Encapsulation of the yeast resulted in consumption of at least 50% more xylose compared with suspended cells over 96-hour fermentations in medium containing both sugars. The higher consumption of xylose led to final ethanol titres that were approximately 15% higher. In an inhibitory dilute acid spruce hydrolysate, freely suspended yeast cells consumed the sugars in a sequential manner after a long lag phase, whereas no lag phase was observed for the encapsulated yeast, and glucose, mannose, galactose and xylose were utilised in parallel from the beginning of the cultivation. Conclusions Encapsulation of xylose-fermenting S. cerevisiae leads to improved simultaneous and efficient utilisation of several sugars, which are utilised sequentially by suspended cells. The greatest improvement is obtained in inhibitory media. These findings show that encapsulation is a promising option for production of second-generation bioethanol.