An encapsulation method in which yeast cells were immobilized in calcium alginate capsule was investigated. The calcium alginate capsule could burst because of carbon dioxide gas produced during ethanol fermentation. A new method for preparing calcium alginate microcapsules was developed and it was observed that gas transfer was further facilitated about two times as fast as in conventional capsule membrane. By adding a small amount of calcium chloride in the medium it was possible to control the swelling of the microcapsules and increase the dry cell density to 310g/l. The rate of ethanol production of the system was nearly the same as that of bead system in continuous operation. For the calcium alginate capsule without adding surfactant, it was possible to increase the gas transfer rate about 20 times by lowering the dry cell density of the capsule to about 74g/l. This was possible because of thin wall thickness and expanded surface area of the capsule.