Unstable oil markets with rising environmental concerns have revived widespread interest in production of fuel ethanol from renewable materials. Cellulosic materials are abundant and prominent feedstocks for cheap ethanol production. However, due to recalcitrant structure of these materials, pretreatment is a prerequisite. Depending on the biomass, pretreatment and hydrolysis conditions, a number of degradation products and/or toxic components may be released that show strong inhibitory effects on the fermenting microorganisms. This thesis deals with application of encapsulation technology to ferment the highly toxic hydrolyzates without further pretreatment. Free cells could not tolerate presence of 5 g/l furfural in defined medium, and inhibitors in wood and peel hydrolyzates in batch mode of operation and fermentation failed. Continuous cultivation of wood hydrolyzate was only successful at 0.1 h−1 and the majority of cells lost their viability after 5 retention times. Encapsulated cell system could successfully ferment the synthetic medium containing 5 g/l furfural during sequential batch cultivations with ethanol yield of 0.41-0.42 g/g. Cultivation of undetoxified hydrolyzates was also carried out, where glucose and mannose were converted within 10 h without significant lag phase. However, a gradual decrease in cell activity was observed in sequential batches. Continuous cultivation was more successful, and wood hydrolyzate was fermented to ethanol by encapsulated S. cerevisiae at dilution rates up to 0.5 h−1. More than 75% of the encapsulated cells were viable in the worst conditions. Ethanol was produced with yield 0.44 g/g and specific productivity 0.14–0.17 g/g•h at all dilution rates. Contrary to wood hydrolyzate, where there is no preference for permeation of sugars or inhibitors through the capsules’ membrane, encapsulation technology was applied to eliminate inhibition of limonene in fermentation of orange wastes to ethanol. The capsules’ membrane, of hydrophilic nature, is practically impermeable to hydrophobic compounds such as limonene while allowing penetration of nutrients and products. While presence of 0.1% v/v limonene in the medium results in strong inhibition or even failure of cultivation with free cells, using this technique allowed fermentation of a medium containing 1.5% v/v limonene. The impact of encapsulation on the anaerobic growth pattern, morphological and physiological changes of S. cerevisiae over long-term application was investigated. The growth rate, total RNA and protein content of the encapsulated cells decreased gradually over repeated batch cultivations, while stored carbohydrates content increased. Within 20 batch cultivations, total RNA and protein content of encapsulated cells decreased by 39% and 24%, whereas glycogen and trehalose content increased by factors of 4.5 and 4, respectively.