Three prisons will be closed with the loss of almost 850 places, Justice Secretary Kenneth Clarke said today.
Ashwell prison in Rutland and Lancaster Castle, Lancashire, will be closed by March.
A third jail, Morton Hall women's prison in Lincolnshire, will be turned into an immigration detention centre "as soon as possible", the Ministry of Justice said.
Mr Clarke told MPs: "The decision to close any prison is a difficult one but one that we have had to make.
"Closing outdated and expensive prisons is an important step in our strategy to provide a secure and modern, fit-for-purpose prison estate, while improving efficiency and value for the taxpayer.
"The changes will reduce our current capacity by 849 places and I am confident that they can be safely managed within existing headroom, whilst maintaining our ability to cope with any increase in population."
There were 82,991 prisoners last Friday, about 5,000 less than the usable operational capacity of 87,936, MoJ figures showed.
Last month, Mr Clarke set out plans to reduce the prison population in England and Wales by about 3,000 over four years.
Mr Clarke's plans would see judges given more discretion over how long killers spend behind bars, more offenders handed fines or community sentences, and foreign nationals allowed to avoid jail as long as they leave the UK forever.
Mr Clarke said it was a "simpler, more sensible" approach but Tory backbenchers voiced concern that criminals would avoid being sent to prison.
Today he added: "Security remains our highest priority and we will ensure that this, along with efficiency and current performance levels, is maintained across the estate.
"Decisions on the future size of the prison estate will be driven by population demand and prisons will only close when capacity allows.
"We will always ensure that there are sufficient places for those offenders sentenced to custody by the courts, including a margin to manage fluctuations in the prison population.
"Decisions to close future capacity will only be taken if they do not put this ability at risk."
Prisoners will be moved to other jails and staff will be offered a "voluntary exit" scheme or moved to neighbouring establishments, Mr Clarke said.
He said: "The conditions at HMP Lancaster Castle and HMP Ashwell are well known.
"HMP Lancaster Castle is housed in a medieval castle and whilst staff at the establishment have done an admirable job and must be commended, the building places severe limitations and restrictions on their ability to deliver the requirements of a modern prison service.
"Two-thirds of the accommodation at HMP Ashwell is out of use, and the estimated refurbishment costs mean that it would not be financially viable to rebuild the site to the standards required.
"HMP Lancaster Castle and HMP Ashwell will therefore close.
"A range of options for staff at these sites is being developed, including redeployment to neighbouring establishments and a voluntary exit scheme.
"Prisoners will be moved to other establishments appropriate to their security category."
Morton Hall will be managed by the National Offender Management Service on behalf of the UK Border Agency.
"The women who are currently held in HMP Morton Hall will be moved to other sites within the estate," Mr Clarke said.
"Work to effect these changes will start immediately."