Some inmates serving jail terms of four years or less will be released early due to prison overcrowding in England and Wales, Lord Falconer has said.
Lord Falconer said the measures would come into force on 29 June
It could mean 25,000 prisoners or more being released early on licence, the BBC's Daniel Sandford said.
It would not include those convicted of serious sexual or violent offences, the justice secretary added.
He also said 1,500 new prison places would be created - the first of these available from early 2008.
His statement comes as the prison population breaks the 81,000 barrier for the first time.
The Conservatives condemned the plan to release prisoners early. Shadow Home Secretary David Davis said the public could be at risk.
Lord Falconer said work to construct 500 of the new prison places would start "immediately". These are in addition to 8,000 places already announced which are expected to be built by 2012.
Lord Falconer told the Lords the emergency measure would come into force on 29 June.
"This is a temporary measure," he said. "Release on licence is not the same as executive release. Releasing people on licence means their sentence continues."
It would not include foreign nationals who would be subject to deportation at the end of the sentence or those who had previously broken the terms of their temporary release.
The use of police cells may have to continue until the end of this year, he added.
BBC home affairs correspondent Daniel Sandford said "what he [Lord Falconer] was actually saying is that he is going to free 25,000, possibly more, prisoners early and it is just that in so doing he is going to reduce the prison population at any one time by 1,200."
Last month, Lord Falconer said he would not use early release to ease pressure.
Ministers have been loath to introduce any form of early release, fearing it would dent public confidence in the justice system.
PRISON FACTS AND FIGURES
About 147 people per 100,000 are in prison in England and Wales - the highest proportion in Western Europe
The prison population has almost doubled from about 41,000 in 1993
More than 17,000 prison spaces have been created since 1997 - a further 8,000 are planned
More than half of prisoners serve less than six months, and one in five is held on remand
About two thirds of released prisoners are reconvicted within two years
The prison population in England and Wales has risen steadily over the last eight years - from 64,530 in June 1999 to 81,016 on Monday night.
Our correspondent said the jails were so full that some 400 prisoners were being held in police stations each night and around 100 were held in court cells.
Prisoners had been held in one London magistrates' court for the last two weekends. It lacked proper washing facilities and staff were having to bring in mattresses for inmates to sleep on, our correspondent said.
Mr Davis criticised the plans and said the public would be affected.
"It is clear from what has been announced today that there will be a continuing reliance on police and court cells, meaning the taxpayer will continue to pay through their pay packets, he said.
"The government's poor record at preventing those released on licence from committing more crimes means they will also continue to pay with their safety."
He also said prime minister in waiting, Gordon Brown, was "responsible for the prison crisis".
"He froze the Home Office budget and refused to allow extra prison places because he could not commission them through PFI (private finance initiative) thereby keeping them off the balance sheet."
Prison Reform Trust director Juliet Lyon said: "Releasing some people, assessed as no risk to the public, will take the heat off overcrowded jails for a while.
"Instead of lurching from crisis to crisis, government must use this respite to set out how it will reserve prison for serious and violent offenders."
Chairman of the Police Federation of England and Wales, Jan Berry said: "A short-term revolving-door policy does nothing to protect the public, to motivate police officers or addresses the prison crisis in the long term.
"Whilst in the future it could be made possible to effectively monitor more offenders in the community, the structure and the resources are not in place to make this a safe or viable option at the present time."
On Monday, the Prison Governors Association said convicts should be set free a week early to give the system some "breathing space".