Prison officers and the police will also be able to eavesdrop on offenders and gain intelligence on other crimes.
The new "smart card" system allows the prison authorities to restrict which people inmates can telephone.
The initiative follows a number of high-profile cases in which inmates were able to "stalk" and terrorise people by telephoning them despite being in jail.
In one case a paedophile jailed for molesting boys continued to harass them with telephone calls and letters from prison. A victim aged 12 was reduced to tears when Andrew Charlton, 32, telephoned him at his home from Winchester jail. The boy's parents said that Charlton was using the protection of jail to assault their son further.
In another incident a violent offender, who obtained details of one of his victims from a police officer, would ring women from jail and terrorise them. At one point he obtained details of which clothes the woman had been wearing and telephoned her to describe them.
Inmates have also used the telephone to arrange for drugs to be dropped off at the perimeter fence.
The Prison Service has become concerned about an illegal market in phone cards, which has led to some inmates being intimidated and forced to hand them over.
From the beginning of January BT will start fitting new payphones that allow calls only to a pre-approved list of numbers. People will also be able to bar calls from jail if they do not want to receive any by tapping in a pin code.
The new telephones will be installed into maximum security jails first and to all prisons in England and Wales in about 18 months. BT said yesterday that it had won a pounds 100m contract to carry out the work and maintain the system for 10 years.
George Howarth, the Home Office minister who announced the scheme, said yesteday: "This new technology will be a vital weapon in combating the menace of prisoners harassing victims from inside.
"It will allow people some peace of mind against the malicious behaviour of a small minority of prisoners who seek to continue to inflict misery on their victims in custody."
A Prison Service statement added: "Prisoners will be prevented from using the telephone for illicit purposes such as stalking or drug-dealing, while still able to maintain legitimate outside ties.
"The system affords the Prison Service an efficient means of managing prisoner calls and gathering intelligence and information about attempts at telephone misuse."Reuse content