Muslim prison inmates could be driven to extremism by a "blanket, security-led" approach that treats them all as potential terrorists, warns a report.
The chief inspector of prisons said there was a risk of a "self-fulfilling prophecy" by fostering alienation.
Jails must engage with Muslims individually, not "as part of a separate and troubling group", Dame Anne Owers said.
Prison authorities said all prisoners were treated with respect and decency.
Three years ago the Prison Service began training staff to identify and respond to signs of radicalisation.
Dame Anne's report said this had encouraged a focus on Muslims as "potential extremists" - even though under 1% of the 10,300 Muslim prisoners in England and Wales had been convicted of terrorism.
"It would be naive to deny that there are, within the prison population, Muslims who hold radical extremist views, or who may be attracted to them for a variety of reasons," said Dame Anne.
"But that does not argue for a blanket, security-led approach to Muslim prisoners in general."
She called on the National Offender Management Service (Noms) to develop a strategy "for effective staff engagement with Muslims as individual prisoners with specific risks and needs, rather than as part of a separate and troubling group".
"Without that, there is a real risk of a self-fulfilling prophecy: that the prison experience will create or entrench alienation and disaffection, so that prisons release into the community young men who are more likely to offend, or even embrace extremism."
Muslim prisoners were found to have a more negative experience of prison, often because of fears for their own safety.
Dame Anne's report said that Islam played a positive and rehabilitative role in the lives of many prisoners, despite staff being suspicious of religious acts.
It also found that most "convenience Muslims", who had converted to Islam for mixed motives - such as perceived dietary benefits or protection within the group - subsequently became genuinely practising Muslims.
Juliet Lyon, of the Prison Reform Trust, said Muslim prisoners were "too often" seen as potential extremists.
"Without proper support all prisoners, regardless of their race or religious background, are likely to become disaffected from society," she warned.
Noms director general Phil Wheatley denied the service had adopted a security-led approach to Muslim prisoners.
"Our clear policy is that all prisoners are treated with respect and decency, recognising the diverse needs of a complex prison population, and that the legitimate practice of faith in prison is supported," he said.
Staff were being trained on faith issues, and "considerable progress" had been made in meeting the religious needs of Muslim prisoners, he said.
"It is right that such work complements the work we do to manage the risks of extremism in prisons, which is a proportionate response to security concerns," he added.