In a move to ease prison overcrowding, criminals sentenced to four years in prison could be released after 18 months. A two-year sentence would mean six months would be spent in jail.
The Conservatives and Liberal Democrats have already condemned the plans.
The prison population has risen to a record 77,599, an increase of 226 since last Friday.
It was reported that 174 prisoners were locked out of jails in London and the West Midlands this week due to a lack of prison spaces.
It was understood they were held overnight in police cells while arrangements were made to transfer them elsewhere in the country.
Under the new tagging proposals, prisoners would be released early under a curfew and electronic tag, in addition, to the automatic release halfway through all sentences of less than four years.
It is understood half the 70,000 prisoners sentenced each year to less than four years in jail for sentences such as burglary, fraud and theft would be eligible. Sex and violent offenders would not be eligible for the scheme.
A Home Office spokesman confirmed the proposal was one of several being investigated, along with building further accommodation and using community sentences as a "tough alternative to a custodial sentence".
He said: "The position at the moment if that we are monitoring the situation closely.
"There does remain capacity in the system for space and we are expanding further. No decisions have been taken yet."
He added that additional places would be available by June.
Shadow Home Secretary David Davis said the Government should instigate a prison building programme to meet the shortfall.
"This demonstrates only too clearly that the Government's attempts to get justice on the cheap are falling apart," he said.
"Its failure to provide the necessary prison places will mean that criminals will not be punished properly, nor will the public be protected adequately.
"The proper action for the Government to take now is to immediately instigate a prison building programme to meet the shortfall."
Mark Oaten, the Liberal Democrat Home Affairs spokesman, said in an interview with The Times: "What kind of message does this send to the courts and the public when sentences are simply going to be overruled by the Government?"
"Extending tagging yet again is typical of Blair's knee-jerk approach to policy," he added. "It is not a long-term solution. Prisoners should be tagged if it is in the best interest of rehabilitation, not because there is an overcrowding problem."
Charles Bushell, the general secretary of the Prison Governors Association told The Times the plan would only help ease the crisis in the short term.
"In the last six months we have seen our prison population increase by over one thousand," he said. "One third of that increase has occurred in the last month."
He said an initiative was needed quickly to ease the rise in people being sent to jail.