Up to 500 places will be available in police cells by Thursday to help ease the shortage of prison space in England and Wales, John Reid has said.
Speaking to MPs, the home secretary announced several initiatives including funding of up to £2,500 when foreign inmates agree to be repatriated.
He said "maximum flexibility" would be provided for transfers to open jails.
The prison population reached a record 79,843 at the weekend, and in theory there were just 125 more spaces left.
The prison figure fell by 24 on Monday, according to official statistics.
Prisoner numbers have risen by more than 600 in the past six weeks, and are likely to continue to rise until Christmas.
'Tried and tested'
The use of police cells to house inmates is dubbed "Operation Safeguard".
Mr Reid said: "The use of Safeguard is not ideal. But it is tried and it is tested."
He announced a 12-month pilot scheme for foreign prisoners who agree to serve their sentences abroad. The scheme only applies to those from countries outside the European Economic Area.
They would receive between £500 and £2,500 - not in cash, but "in kind" to pay for reintegration support in the form of education, accommodation, medical care, training or assistance with starting a business.
A Home Office spokeswoman pointed out the money compared with £28,000 which was the average cost of housing an inmate for a year.
She said there were currently 10,970 foreign nationals serving sentences in British prisons, around 8,000 of whom came from outside the European Economic Area.
Inmates from non-EU countries
Jamaicans - 1,539
Nigerians - 990
Pakistanis - 437
Somalians - 343
Source: Home Office
BBC political editor Nick Robinson said the government was also moving to change the law to remove the need for the consent of prisoners before they can serve their sentences elsewhere.
The other main points of the home secretary's announcement were:
The government will no longer attempt to fight appeals against deportation by criminals from the European Economic AreaThe possibility of introducing an early release scheme for prisoners at a later date is not ruled out but would be a "last resort"Converting a former army barracks in Dover into new accommodation for prisoners to provide an extra 200 places by DecemberPlans to use a former secure hospital in Ashworth East near Liverpool to offer a further 350 placesSupport for the use of community sentences for non-violent and non-sexual offenders, if appropriateTwo women's prisons would take male prisoners
Shadow home secretary David Davis told the Commons: "Frankly there is no excuse for the catastrophe facing the country today.
"In the last five years the government have had warning after warning that they were going to run out of cells."
Liberal Democrat home affairs spokesman Nick Clegg said: "Public safety is yet again at stake because of government incompetence.
"The home secretary's sticking plaster solutions are too little, too late. You should have the courage and the foresight to think anew."
Police Federation vice-chairman Alan Gordon said he had "grave fears" over the use of Operation Safeguard.
"Not least because the resilience of the service is already stretched to breaking point, but being a full-time jailer requires a completely different set of skills and training to that of being a police officer," he said.
Hilary Banks, the Association of Chief Police Officers' spokeswoman for Operation Safeguard, said: "We all accept that it isn't an ideal situation and we're obviously dealing with extreme circumstances here."