Plans for three Titan prisons were first announced in December 2007
Plans for three 2,500-place Titan prisons costing an estimated £350m each are to be ditched, the BBC understands.
Instead, Justice Secretary Jack Straw is expected to reveal proposals for five 1,500-place jails, with two set to go ahead immediately.
Sources say the decision has nothing to do with the Budget or making savings.
Shadow justice secretary Dominic Grieve said Britain's criminal justice policy was now in "total disarray" and urged ministers to address the "crisis".
He said: "Warehousing offenders in hulks twice the size of Wembley Stadium was never going to address increased levels of reoffending and so we welcome plans to scrap Titan prisons.
"However, Jack Straw needs to urgently explain how he will address the current crisis in the prison population that has resulted in thousands of prisoners being released early."
A Ministry of Justice spokesman said it had consulted widely and listened carefully to all views and that total prison capacity would still increase as planned.
"Since 1997 the government has increased prison capacity by 24,000 places and we remain on course to increase the total number to 96,000 by 2014," the spokesman said.
We were going to end up with people warehouses, says Juliet Lyon
Juliet Lyon, director of the Prison Reform Trust, said all the evidence suggested Titan prisons would have been harder to run and could have led to higher reoffending rates.
She said: "We hope the pressure on public finances will now mean prison policy is focused on what works, not on what gets good headlines."
Crime reduction charity Nacro said the government still had a strategy of prison expansion that was a waste of money.
"Resources would be better spent on community sentences, offender rehabilitation and crime prevention," said chief executive Paul Cavadino.
"We need a strategy designed to cut our use of imprisonment to levels nearer those of our European neighbours."
Jon Collins, campaign director for the Criminal Justice Alliance, thinks the decision to abandon the 2,500-place jails is a victory for penal reformers but says the new proposals are "little better".
Prison overcrowding remains a problem in England and Wales
And director of the Howard League for Penal Reform, Frances Crook, said Titan jails were a disastrous idea and were now a "titanic policy failure".
"Building five 1,500-place prisons - bigger than any other jail in the country - is not the answer to the chronic problems of overcrowding and violence in our jails," she said.
"It is time for the government to look at wholesale reform of the criminal justice system."
The Liberal Democrat justice spokesman David Howarth agreed, saying Titan jails were a "colossal waste of money" and ministers should pursue "smarter" policies.
"It is disappointing that ministers remain committed to lavishing billions on five more prisons which will be filled as soon they are built," he said.
"Ministers should start pursuing smarter criminal justice policies to stabilise the prison population, starting with moving drug addicts and the mentally ill into more appropriate accommodation."
Mr Straw first announced plans for the three Titan prisons in December 2007, at an estimated cost of £350m each.
THE PRISON POPULATION
There are 82,586 prisoners in England and Wales
52,117 criminals in England and Wales have been released early since June 2007 under a scheme to reduce overcrowding
About 3,000 released under the scheme were foreign nationals
Source: Ministry of Justice
He told MPs they would "fulfil our commitment to provide a modernised prison system that protects the public from the most serious offenders".
The five prisons planned as an alternative would be among the biggest in England and Wales.
HMP Wandsworth, which on average holds 1,461 male prisoners, is currently the largest prison in those countries.
The Titan jail plan followed Labour peer Lord Carter's recommendation for an extra 10,500 places in England and Wales in a review of prison overcrowding.
Their likely locations were London, the West Midlands and the North West.
A 2008 consultation paper on prison expansion said each jail would stand four or five storeys high on a 50-acre site with a cluster of smaller units holding around 300 prisoners.
They were likely to have held a total of around 1,000 remand prisoners and 1,500 medium-security Category B prisoners.
The BBC's home affairs producer Gaetan Portal said there could be more prosaic reason for the demise of Titans.
"The challenge of obtaining planning permission for three new sites was proving to be just too difficult - far easier to build more, but smaller jails," he said.