Home Secretary John Reid says he is reshuffling more than a quarter of his top team of officials as he tries to "transform" the Home Office.
Mr Reid has admitted his "head is on the block" over the reforms
Fifteen directors will change - but none of them will lose their jobs.
Mr Reid, who has called his department "dysfunctional", told MPs a new study had vindicated his criticisms.
The immigration directorate is to become a semi-independent agency and Mr Reid vowed to clear the backlog of asylum cases in five year or less.
The Home Office has faced a stream of damaging headlines over immigration failures and the failure to consider more than 1,000 foreign prisoners for deportation before their release.
The prisons debacle cost former Home Secretary Charles Clarke his job. Two months ago, Mr Reid said parts of the Home Office were "unfit for purpose".
15 Home Office directors to be changed and new "top team" set up
Size of Home Office HQ to be cut by 2,700 staff by 2008, with another 600 posts going by 2010
Immigration and Nationality Directorate to become "arms length" agency
Backlog of asylum cases to be cleared in "five years or less"
Since then, he says he and his officials have worked around the clock to draw up an "ambitious set of reforms" to help restore public confidence.
In a Commons statement, Mr Reid said the focus of the Home Office would be "sharpened" around key priorities and a new "top team" established.
All directors face having their skills assessed by September, with "intensive" efforts to fill any gaps.
And there will be a new strategy to "manage risk" and provide accurate information and statistics.
The size of staffing at the Home Office's headquarters is to be cut by almost a third by 2008 (2,700 posts), with another 600 posts going by 2010.
The reforms are due to save £115m by 2010 but most of them were covered in efficiency saving plans two years ago.
"These changes will mean the biggest shift from the centre to the front line in Home Office history," said Mr Reid.
Leadership under fire
An independent capability study says leadership and skills at the Home Office are "too variable" and there is not enough "cross boundary working" and systems are "poor".
Mr Reid says the Home Office has enjoyed successes but was designed to tackle the problems of the Cold War and before.
On Thursday, he will be announcing plans to "rebalance" the criminal justice system away from offenders in favour of the victims of crime.
They will include changes to sentencing, with automatically reduced jail terms for people pleading guilty and proposals on human rights laws.
The BBC understands that Mr Reid is planning 8,000 new prison places - boosting current capacity in British jails from around 78,000.
Under existing plans, an extra 1,000 places would become available from next June and by 2007, the capacity would reach 80,400. Ministers have concluded that this is inadequate.
No timetable on when these new prison places will be introduced has been disclosed.
Mr Reid says he is in talks with Chancellor Gordon Brown about funding and no final decisions have been reached yet.
The home secretary says he has full confidence in Lin Homer, the head of Immigration and Nationality Directorate (IND).
He is making the IND an "arms length" agency and it will have a new director focussing on enforcement.
He says the asylum backlog will be cleared within five years, despite a trawl of files finding between 400,000 and 450,000 case files. Last year, the Home Office insisted an estimate of 283,000 cases was too high.
New laws are also being planned to ensure that deporting foreign prisoners is the "norm".
But Mr Reid will not reveal further details of changes to the immigration system until next week.
The idea of making IND an arms length body will be welcomed by many immigration campaigners who have long argued that the move would prevent crises engulfing the Home Office.
Keith Best, from the Immigration Advisory Service said: "The perception, let alone the reality of ministers interfering in individual decisions, has cost them their jobs in the past and does nothing to instil public confidence in the system."
But former Conservative Home Secretary Michael Howard said the move would make it more difficult for ministers to get a grip on problems.
Shadow home secretary David Davis said the Tories agreed with many of the plans, but wondered why ministers had taken 10 years to come up with them.
The public would not allow ministers to "sweep a political problem under a bureaucratic carpet", he warned.
Liberal Democrat home affairs spokesman Nick Clegg said he was "somewhat under whelmed by what looks like a hotchpotch of managerial double-speak and wildly implausible targets".