The Prison and Probation Services are to be merged into a single service, David Blunkett has announced.
Community programmes may replace short custodial sentences
A single National Offender Management Service will be created by June this year, the home secretary told MPs.
The new body, to be headed by ex-Prison Service chief Martin Narey, will have responsibility for the rehabilitation of offenders in and out of custody.
Greater emphasis will be placed on community punishments and fines at the expense of short prison sentences.
In a Commons statement, Mr Blunkett said from this month, Kirkham Prison in Preston and Morton Hall Prison in Lincoln will trial periods of intermittent custody, such as imprisoning offenders at weekends only.
Other new schemes could include "day fines" - giving minor offenders means-tested fines for a certain number of days or they face prison for the same amount of time.
The aim of the measures was to "reduce crime by radically
transforming the performance of the prison and probation services".
The government hopes the plans will reduce the projected 2009 prison population from 93,000 to 80,000.
Not for profit and voluntary organisations will work in partnership with the new offender management service, which will have a budget of £3.2bn this year.
Judges and magistrates would also be expected to make efforts to meet
guidelines to reduce the "drift" to longer sentences and cut huge regional
The home secretary stressed that he planned to tackle racism and bullying in the two services.
The measures should create a more "effective, consistent and transparent"
criminal justice system, he said.
A national offender manager will be appointed to report to Mr Narey and nine regional offender managers, plus one for Wales, will be responsible for prisoners from beginning to end of sentencing whether in prison or in the community.
Mr Blunkett said: "This is a once in a generation opportunity to transform the way we manage offenders to make sure they pay back the community they have harmed, to reduce reoffending and to cut crime.
"This radical approach would not be possible without the very significant progress we have already made in investing in and improving the performance of the prison and probation services in recent years."
Shadow home secretary David Davis welcomed many of the changes, but he warned the services were too overstretched.
The plans, which come in the wake of a review of the system by trouble-shooter Patrick Carter, were
an "admission of failure", he said.
"It is the inevitable result of having a home secretary who talks tough on sentencing, who creates more crimes and more imprisonable offences but doesn't build enough prisons to house the increasing number of criminals and is then surprised when his prisons overflow."
David Heath, for Liberal Democrats, welcomed the new service, adding that the Probation Service was in "melt-down, both in financial terms and
in the scant support it's able to offer tens of thousands of offenders".
"Adequate capacity in the prison service needs to be
there in each region to match local needs so that prisoners are not moved from
place to place and they are held securely in a meaningful corrective regime," he said.