The prison population in England and Wales is currently at 82,000
The number of inmates in England and Wales' jails should be cut by a third, and the money saved put into community penalties, a report by MPs has said.
The cross-party Justice Committee said evidence showed community punishments would have a better chance of cutting re-offending.
The committee said a £4.2bn prison building plan was a "costly mistake".
But the Ministry of Justice said its current strategy was working and reoffending rates had been falling.
There are more than 82,000 people in prison in England and Wales, down from a record high of nearly 84,000 in summer 2009.
With a major building programme under way, there are likely to be 96,000 prison places by 2014.
But in a detailed and lengthy report, the justice committee says prison should be a last resort, with thousands of criminals dealt with entirely in the community.
It said millions of pounds could be diverted from the prison system into improving local public services that had a more direct affect on cutting offending, including education and drug addiction programmes.
The MPs said: ''We are worried that the government seems to accept the inevitability of a high and rising prison population and remains committed to building larger prisons.
''We are convinced that prison building on this scale will prove a costly mistake.
''The prison population could be safely capped at current levels and then reduced over a specified period to a safe and manageable level likely to be about two-thirds of the current population.''
A Ministry of Justice spokesman said prisons were investing in drug treatment, training and education.
"We have bolstered community punishments to ensure they are tough, innovative and offer locally based alternatives to custody," he said.
"People who commit serious offences are going to prison for longer and are being rehabilitated - and the rate of re-offending continues to fall."
The committee said it acknowledged that its proposals to shift funding from prisons to communities were complex - but added reoffending could only be significantly cut if money was put into local authorities best placed to turn around an offender's life.
Chairman, Sir Alan Beith, said: "Whoever forms the next government, they face a choice between unsustainable 'business-as-usual' in the criminal justice system, and making some radical decisions.
"It is the responsibility of governments and Parliament to protect citizens from crime by using the taxes they pay as effectively as possible. And that is not what is happening.
"A demand-led policy of building ever more prison places is being fuelled by political and media pressure for more and longer custodial sentences, diverting resources away from measures which are more likely to prevent future crime."