Plans to build two new prisons - in Merseyside and in London - have been announced by Home Secretary John Reid.
The prisons, in Maghull, near Liverpool, and next to Belmarsh prison in Woolwich, south-east London, will provide an additional 1,300 spaces.
They are part of plans to provide an extra 8,000 cells over five years.
Mr Reid came under fire last month for asking judges to jail only serious criminals, as it emerged that prisons were at "bursting point".
He denied encouraging softer sentences for criminals to ease prison overcrowding, saying he was merely re-stating existing guidelines.
Since then the prison population has stabilised, but numbers are predicted to increase by up to 8,000 over the next few years.
"The rise in the prison population didn't start last Wednesday, it's been going on steadily for about 20 years"
There are nearly 80,000 prisoners in England and Wales, with some inmates held in police stations and court cells to ease overcrowding.
Of the two new jails, the one next to Belmarsh still requires planning permission.
Approval has already been granted for the prison planned for the Maghull site - where Kennett Prison, due to open this summer, is also being built.
Hundreds of ready-built units are to be placed on existing prison sites and the government is negotiating to try to buy and re-fit two ships, probably to hold those awaiting deportation.
Last month the chief inspector of prisons, Anne Owers, said the overcrowded jail system was in "serious crisis".
She said prisons had become "like a funnel where liquid is being poured into the top with no tap to release it at the bottom".
A Home Office spokesman said the department had delivered 20,000 more prison places since 1997.
Former Conservative prisons minister Anne Widdecombe MP said Mr Reid was doing too little, too late.
"The rise in the prison population didn't start last Wednesday, it's been going on steadily for about 20 years."
'Dramatic rethink'
Liberal Democrat home affairs spokesman Nick Clegg said: "John Reid's ill-formed plans for a few extra prison places will not solve this crisis in the long term.
"By the time these two new prisons are built, we will need even more places than Reid is planning unless there is a dramatic rethink of our prison strategy.
"With the prison population set to reach 100,000 and reoffending on the rise, it is clear that Labour's policy of mass incarceration isn't working."
Enver Solomon, deputy director of the Centre for Crime and Justice Studies at King's College London, said the government had not grasped the basic issue that sentencing policy rather than lack of prisons was to blame for overcrowding.
"It's not actually going to deal with the fundamental issue... that sentencing has become much tougher. It's a bit like adding extra lanes to the M25 - they'll get filled up very quickly."
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