The new coalition government has decided to scrap the construction of a new prison for juveniles.
The Ministry of Justice said proposals to build a 360-bed centre at Glen Parva, near Leicester, had been stopped.
The move is part of the £325m in savings the department will make as part of an overall £6bn in cuts.
An equivalent number of adult prison places will instead be created on existing prison sites.
The number of young people in custody has been falling in the past year, with 1,707 15 to 17-year-olds in custody compared with 2,156 12 months ago.
Frances Crook, of the Howard League for Penal Reform, said: "Sending children into large, violent prisons miles away from their home does not address offending behaviour and fails to make society safer, as the 75% reoffending rate demonstrates.
"Given the current financial climate and welcome decrease in the number of children being sent to prison, it is ludicrous that the new prison for children was ever suggested."
Penelope Gibbs, of the Prison Reform Trust, added: "The challenge is now to keep the child custody population down by reducing the overuse of remand and preventing the courts imprisoning so many under 18-year-olds for non-violent offences."
Prisons minister Crispin Blunt said: "The number of juveniles in custody is falling, so it makes financial sense for us to boost the adult prison capacity by increasing the number of prison places available on existing sites - an alternative that provides substantially better value for the taxpayer."