The governor of Brockhill Prison, Redditch, Worcestershire, was ordered to pay 25-year-old Michelle Evans pounds 5,000 damages for false imprisonment after she served 59 extra days as a result of confusion over calculating release dates.
A spokesman for the Prison Service, which is struggling to cope with a record jail population, admitted yesterday: "Claims for damages will probably be in their hundreds."
The case stems from a ruling in November 1996 that the method used for calculating inmates' release dates was unlawful and that hundreds of prisoners, going back six years, had spent too long behind bars.
The problem affected prisoners given consecutive sentences where the time they spent in custody awaiting trial was not correctly deducted.
Following that decision, hundreds of inmates were released. The number eligible for compensation is as yet unknown - there are at least 40 cases lodged with the courts, but the total could reach 4,600.
If the average payout is pounds 5,000, that would mean the Prison Service would have to find an extra pounds 24m plus legal costs - at a time when it has been pleading with the Home Office for extra resources.
Jack Straw, the Home Secretary, recently sanctioned an extra pounds 43m to pay for more cells. Now he could be forced to further increase funding.
The Prison Service is considering whether to appeal to the House of Lords against yesterday's judgment, which also reversed an earlier ruling that governors could not be held liable to pay compensation.
Ms Evans had been jailed for two years for terrorising an 18-year-old stranger in a Cardiff street, tearing off the young woman's engagement ring and two gold chains.
She was convicted on charges of burglary, robbery and assault.
The three Appeal Court judges were headed by Master of the Rolls Lord Woolf who pointed out the governor of Brockhill could not have released Miss Evans earlier than he did because he was carrying out his duty to apply the law as it then stood.
But it was a "deeply embedded" principle of English law that a person imprisoned without lawful authority was entitled to damages.
Until yesterday no compensation was payable because it was held that the High Court decision was not retrospective.
Harry Fletcher, of the National Association of Probation Officers, said that some 800 inmates a year over six years served too long in jail.
Paul Cavadino of the National Association for the Care and Resettlement of Offenders added: "The Treasury should make the necessary resources available so the Prison Service does not have to cut spending in other important areas in order to pay compensation."Reuse content