Micro/nano-sized particles provide a control on optimization of the therapeutic index of cancer drugs. This study reports successful modification of the multi-responsive microgels based on a water-soluble 2-(N-morpholino) ethyl methacrylate (MEMA) monomer for sustained drug delivery of 5-fluorouracil (5-FU). PMEMA microgel hosting 5-FU loaded 1,2-dipalmitoyl-sn-glycero-3-phosphocholine (DPPC) liposome system was successfully prepared. DPPC liposome-based PMEMA microgel system was also studied in in-vitro studies as a drug carrier and controlled drug release system in phosphate buffer solution and normal saline solution. The release of 5-FU from both PMEMA microgel and liposome-based PMEMA microgel systems was analyzed using HPLC with ultraviolet spectrophotometer detector (lambda 266 nm). The cytotoxic assays of liposome-based microgel and 5-FU loaded liposome-based microgel systems were investigated using L929 and MCF-7 which are mouse fibroblast cell line and breast cancer cell line, respectively. In conclusion, PEGylated PMEMA microgel and liposome-based PEGylated PMEMA microgel system provided long-time sustained drug release of 5-FU. It has been observed that the 5-FU release from PEGylated PMEMA system was faster than that of DPPC liposome-based microgel system. Additionally, 5-FU release from DPPC liposome-based microgel system was determined to be very effective on MCF-7 breast cancer cell line, which indicates great potential for further in-vivo studies.