Home Secretary John Reid has had to face criticism after increasing problems within the prison and youth justice systems.
The Home Office advised judges that prisons are full
Prison over-crowding prompted two judges not to impose custodial sentences on paedophiles, and the head of the Youth Justice Board has quit.
Lib Dem home affairs spokesman Nick Clegg said such problems were "further undermining public confidence".
And children's' groups expressed anger that the paedophiles were not jailed.
The sentencing row erupted after a judge in Wales said he would not imprison a paedophile because of a recent letter from Mr Reid reminding judges that there were other options to custody, especially with prisons full with the maximum number of inmates.
A second judge, sitting in Exeter Crown Court, also said he had no choice but to bail a paedophile rather than remand him in custody because of overcrowded jails.
Mr Clegg said: "This is the inevitable domino effect of a government lurching about in blind panic trying to solve a prison overcrowding crisis of its own making.
"By appearing to interfere with the discretion of the judiciary, John Reid is further undermining public confidence in a criminal justice system which is in total decay."
Conservative leader David Cameron called for Mr Reid to "get on with his job" of protecting the public.
"The fact that we have got people dealing with child pornography who ought to be going to prison, not going to prison is the government's fault.
"We've told them for years that they would need to build more prisons to make space available. There's been a failure of planning, a failure of policy, a failure of political will," Mr Cameron said.
Children's charities were appalled by the first sentence, with Dame Mary Marsh, director and chief executive of the NSPCC, saying: "It is unacceptable that people who have committed crimes against children are not jailed simply because prisons are too full if the severity of the crime requires a prison sentence."
Norman Brennan, director of the Victims of Crime Trust, said: "The government has failed in its duty of care to protect Britain from serious and violent offenders, and in particular paedophiles."
The judge could only sentence in accordance with the sentencing guidelines, he added.
The Lord Chancellor, Lord Falconer, defended the letter to judges, which he also signed, as not being intended to change sentencing principles, but to set out the current context.
"The guidelines remain the basis on which the judges sentence.
"If the guidelines give them a choice of custody or non-custody, then inevitably the fact that the prisons are near capacity could have an effect," Lord Falconer said on BBC Radio 4's Today programme.
Rod Morgan resigned from the Youth Justice Board
However, he said it was not possible to tell how much the statement influenced the judge sentencing Williams.
"He bore it in mind, but there were other factors as well. Would Mr Williams have gone to prison before the communication? I don't know."
Lord Falconer said the judges were not being put under pressure to alleviate prison over-crowding.
"It is our problem....We are not for one moment saying that it is a problem for judges to solve. We are all doing our bit in the system to help in the current circumstances."
Youth Justice Board resignation
The head of the Youth Justice Board, Rod Morgan, resigned on Friday, saying: "We're standing on the brink of a prisons crisis."
Liberal Democrat leader Sir Menzies Campbell says the resignation underlined the "shambles" at the Home Office.
He said Mr Reid had not managed to arrest the decline in the department's efficiency and called for "a lot of new thinking" by government to "restore essential confidence".
The Children's Society said it was regrettable that such a "passionate advocate" for children had left.
Society strategy director Penny Nicholls said: "In a spiralling climate of fear fuelled by hype, Professor Morgan has always acted with measure and reason in tackling youth crime."
She agreed with his assessment that the prisons were nearing crisis point.
"A system stretched to bursting point will never provide the sort of intensive work that rehabilitation requires.
"There is an urgent need for more preventative work and a serious effort to make community-based alternatives to custody work."