Judges and magistrates have been asked by Home Secretary John Reid and legal chiefs to jail only the most dangerous and persistent criminals.
Police cells have been used to ease overcrowding
Mr Reid, the attorney general and lord chancellor sent out their advice as the number of inmates in England and Wales hovered about the maximum 80,000 mark.
The government says 8,000 more prison places are being created.
It comes as Norwich jail is reopening a wing declared "unfit" by inspectors because of cell shortages.
The Home Office confirmed that up to 150 remand prisoners will be housed in Norwich's A-Wing as a short-term measure, just days after it closed for refurbishment.
The prison's Independent Monitoring Board described A-Wing as a "horrible" Victorian block in a "very bad state of repair".
BBC home affairs correspondent Danny Shaw says the developments at Norwich Prison are a sign of how serious the overcrowding crisis has become.
Officials will advise Mr Reid that he may soon have no alternative but to order the release of inmates nearing the end of their sentences, our correspondent said.
The government will have 350 extra places in a prison on Merseyside in the spring, but its 8,000 new places will not all be ready for four years, with funding and sites yet to be fully approved.
Speaking during Prime Minister's Questions, Tony Blair said that other options such as prison ships and army camps could be considered.
"All options, of course, are kept under consideration all of the time but the very reason we have an issue to do with prison places at the moment is because... there are currently 40% more dangerous, violent and persistent offenders in prison than in 1997 despite crime having fallen rather than risen.
"And secondly... we now have 2,000 prisoners in prison with indeterminate sentences precisely because of the seriousness of the offence."
Mr Reid, in a speech to the Newspaper Society on Tuesday, said courts should not be "squandering taxpayers' money to monitor non-dangerous and less serious offenders".
"The public have a right to expect protection from violent and dangerous offenders," he said.
"Prisons are an expensive resource that should be used to protect the public and to rehabilitate inmates and stop them reoffending."
A Home Office spokesman said the issue of prison spaces was now an "acute challenge" for everyone in the criminal justice system.
"We are accelerating accommodation arrangements where possible and examining all options for extra capacity in the prison estate as a matter of urgency."
Following Wednesday's revelations, pressure groups and opposition politicians condemned the government's criminal justice policies.
Shadow home secretary David Davis said it was "outrageous" that court sentences were being dictated by the prison capacity and not the offence committed.
"Yet again we see the public are being put at risk by the failure of ministers," he said.
The Lib Dems' Nick Clegg said the government's "arrogance and incompetence" had led to the crisis.
Juliet Lyon, of the Prison Reform Trust, accused ministers of "criminal negligence" for allowing the jail population to spiral so dramatically.
She said: "Politicians of all stripes have talked up fear of crime and talked up prison numbers and actually it's been disastrous... for victims and reoffending rates have just risen appallingly."
And the Prison Officers Association called for more funding to avoid the same thing happening next year.
Operation Safeguard, whereby police cells are used to house prisoners in England and Wales, began again this month.
It is understood about 480 people stayed in police stations on Monday and cells at the Old Bailey were also made available this week.