Conservative leader David Cameron says his party would build 5,000 more prison places in England and Wales - taking capacity in jails to more than 100,000.
Under the plans, older inner-city jails would be sold off to pay for more new prisons on cheaper land elsewhere.
Mr Cameron also wants new "min-max" sentences - with no chance of parole until the minimum term has been served.
Justice Secretary Jack Straw accused him of copying Labour plans, saying the rest of the scheme was "uncosted".
The 5,000 extra spaces would be on top of the 15,000 new prison spaces being created by the government over the next five years.
The package of criminal justice system reforms in the "green paper" also include proposals to:
Bring in tougher community sentences, with offenders wearing uniforms and the withdrawal of benefits for those who do not attend
Ending automatic early release after half the full term. Prisoners who have passed their minimum term would earn their release with good behaviour, work and progress on rehabilitation programmes, such as drug treatment
A victims' fund - those serving custodial sentences would pay into the fund through work in prison
- Sell off 30 Victorian jails in city centres for redevelopment, with goal of ending overcrowding by 2016
Launching the proposals following a visit to Wandsworth Prison, Mr Cameron said: "Almost everything in our criminal justice system is going wrong and our prisons are in crisis."
He told the BBC: "A criminal goes to court - they are told they have got a four year sentence and they are let out after two, so everybody feels cheated.
"We are going to change that and say the judge should read out what we call the 'min-max'.
"And then the prisoner has to earn release through good behaviour, through hard work, through making reparations to their victims."
He added: "The real emphasis on it is actually turning prisons into places not where we just warehouse prisoners and bang them up for 23 hours a day in their cell.
"But they should be places of work, of rehabilitation and of reparation, so that the work prisoners do do, means that they can pay money back to their victims - these are really important policies."
Under the Tory plans, every public sector prison in England and Wales, except the eight high-security establishments, would become an independent fee-earning Prison and Rehabilitation Trust.
The trusts would be able to commission private companies and voluntary organisations, who would also be responsible for inmates after their release.
The trusts would be paid by results, with a bonus if the offender is not reconvicted within two years.
Shadow justice secretary Nick Herbert said making rehabilitation a priority could bring reconviction rates down by as much as 20% and cut the predicted prison population by 6,000 by 2020.
The savings would produce up to £259m a year to invest in rehabilitation programmes.
Under the "min-max" proposal, judges would set the minimum sentence to be served before probation is considered.
And prison governors would decide exactly when inmates were released, depending upon their conduct in jail.
Prisoners who refuse to engage in rehabilitation programmes or to stay off drugs would stay in custody the longest.
The number of inmates this week in England and Wales hit a record high of 82,180.
Learning in jail
Thousands of prisoners have been released early under emergency measures introduced last summer to tackle overcrowding.
The government says 35,000 prisoners undertook training and employment in 2006/7 and spending on learning in prison has trebled to £164m since 2001.
"We have an existing corporate alliance with 70 employers and we recently announced a big expansion plan," a Ministry of Justice spokesman said.
"We also have 370 workshops around the country employing 10,000 prisoners."
And Mr Straw dismissed what he called "a long and very thin document".
"Most of the sensible bits reheat what we are already doing and the rest of it is either incomprehensible or uncosted or both."
Prisoners off their bunks
David Heath, the Lib Dems' justice spokesman, said: "There is no evidence that our extremely high incarceration rates are doing any good."
But Frances Crook, director of the Howard League for Penal Reform, welcomed the Tories' prisons review.
"Our graphic design studio, Barbed in Coldingley Prison, is a beacon of just what could be done to get long term prisoners off their bunks and into purposeful work which pays a real wage and engages them as active citizens," she said.
Juliet Lyon, director of the Prison Reform Trust, called on the government to establish a royal commission, an ad hoc advisory committee often used to investigate major issues.