More than one in seven prisoners at a Victorian era jail had drugs in their system at any one time, a report has said.
The illegal drugs market behind the walls of Pentonville Prison in north London "lies behind many of the gang, debt and violence issues throughout the prison", the jail's independent monitoring board (IMB) said.
Random tests showed 15% of its inmates had illegal drugs in their system at any time in 2010/11, with one in five being prescribed methadone maintenance.
The independent monitors added there were also doubts over the effectiveness of Justice Secretary Kenneth Clarke's policy of using methadone in treating drug dependence and in reducing re-offending.
"The number of drug users coming into prison does not seem to be reducing," the report said.
"The Integrated Drug Treatment System for prisons (IDTS) programme, introduced in the prison in mid-2009, is hugely demanding of resources (this year Pentonville received the largest, just over £1 million, IDTS funding of any adult prison in England).
"Doubts remain as to the efficacy of methadone in treating drug dependence and in reducing re-offending. What is the rationale for the current policy, and when is it to be reviewed?"
But the monitors noted that "determined efforts" were being made to reduce smuggling and corruption.
In May, a prison officer at Pentonville Prison was jailed for smuggling drugs and mobile phones to inmates.
Richard Carew took cannabis and mobiles into the north London prison inside hidden compartments in clocks and cans of drink.
When Carew was arrested at his home in Celt Close, Sittingbourne, Kent, officers found 12 mobile phones ready to be smuggled into the prison.
The volunteers who carried out the annual inspection also found the assessment of newly-arrived prisoners - in terms of their physical and mental heath, their drug problems, and their risk in terms of cell-sharing - was "potentially compromised by the numbers that have to be dealt with each week-day evening".
The report went on: "HMP Pentonville is an overcrowded and physically decaying prison, where most of the inmates live and eat with another prisoner, sharing a bleak cell - with an open lavatory - designed in 1842 by the Victorians for one occupant.
"Because of the limited resources, in terms of education and industrial training, much of prisoners' time is spent unconstructively and in grimly depressing conditions; about half the population is unemployed."
David Miller, chairman of the Pentonville IMB, said: "We acknowledge that the prison continues to improve and are pleased that this year it has reached Noms (National Offender Management Service) level 3 (good performance) status for the first time since mid-2004.
"However, we make no excuse for repeating once again that HMP Pentonville is an overcrowded and physically decaying prison, where most inmates share a bleak cell designed in 1842 by the Victorians for one occupant.
"They live and eat with another prisoner in a cramped space with an open lavatory."
Mr Miller added: "We are seriously concerned about the prospect of reconciling additional budgetary cuts with the prison's prime objective of reducing reoffending after release."
A Prison Service spokesman said: "We take the illicit use of drugs in prisons and the problems they cause incredibly seriously.
"We are working hard to keep contraband out of prison, using a range of security measures to reduce drug supply, including working closely with police forces and carrying out random mandatory drug tests."
Juliet Lyon, director of the Prison Reform Trust, said: "This worrying report shows just how difficult it is to rehabilitate offenders in a large, overcrowded Victorian jail.
"With the highest turnover of all London prisons, Pentonville is a place where people come and go.
"Prisoners stay an average of only 10 weeks and, due to a lack of resources for training and education, half the population is unemployed at any one time.
"For less serious offenders, greater use of community penalties would cut crime more effectively than warehousing them in these grim conditions."