Quantum Dots (QDs) have become an interesting subject of study for labeling and drug delivery in biomedical research due to their unique responses to external stimuli. In this paper, the biological effects of a novel hydrogel based QD nano-structure on E. coli bacteria are presented. The experimental evidence reveals that cadmium telluride (CdTe) QDs that are encapsulated inside biocompatible polymeric shells have reduced or negligible toxicity to this model cell system, even when exposed at higher dosages. Furthermore, a preliminary gene expression study indicates that QD-hydrogel nanospheres do not inhibit the Green Fluorescent Protein (GFP) gene expression. As the biocompatible and externally tunable polymer shells possess the capability to control the QD packing density at nanometer scales, the resulting luminescence efficiency of the nanostructures, besides reducing the cytotoxic potential, may be suitable for various biomedical applications.