Private companies that run probation services are to have their government contracts ended early - after MPs said the system for supervising criminals was in a "mess".
The contracts began in 2015 to manage low-risk offenders in England and Wales, under a partial privatisation by then-Justice Secretary Chris Grayling.
Ministers are proposing further changes and private firms will remain involved.
But Labour said the costly contracts had created an "unprecedented crisis".
It comes after the Commons justice committee said in July that changes to probation had failed, and it was unconvinced private sector firms could ever deliver an effective service.
BBC home affairs correspondent Tom Symonds said the government had hoped that shaking up probation would result in less reoffending. The number of people reoffending has reduced slightly, but those that do are committing crimes more frequently.
The arrangements for managing offenders were overhauled in 2014, with the probation service split in two.
A new state body, the National Probation Service (NPS), was set up to supervise high-risk offenders, with 21 privately run Community Rehabilitation Companies (CRCs) supervising low and medium-risk offenders.
But David Gauke, who became justice secretary in January, said that while the £3.7bn Transforming Rehabilitation (TR) programme had been ambitious and innovative, several CRCs had made "very substantial losses".
Mr Gauke said the amount of work available for the CRCs had been "lower than anticipated and that has had an impact in terms of their income and the services they are able to provide".
He also said he was determined to have a service that reduced reoffending, and could oversee "tough" community sentences with less reliance on "ineffective" short prison terms.
Failure to perform
Existing contracts will now end two years early, in 2020 - and will be replaced with 10 new ones under changes that will cost the government £170m.
This includes £110m that the CRCs owe the Ministry of Justice (MoJ) in fines for failing to meet performance targets - but which they will be allowed to reinvest in services to keep them going for the last two years of their agreements.
The MoJ will also pay £46m over the next two years for services that help offenders immediately after they are released from prison.
The MoJ said it had budgeted to pay firms £2.5bn by 2020 but had only paid out £2.2bn - a saving of £300m - because less work than anticipated was allocated to the CRCs.
This was because there was an increase in the proportion of serious offences which they were ineligible to work on.
Mr Gauke said new contracts would make better use of offending data and would move towards "payment for services delivered", but he ruled out allowing CRCs to take on high-risk cases.
Shadow justice secretary Richard Burgon said: "This decision to throw more good money after bad and the government's re-commitment to a privately-run probation service shows that the Conservatives have run out of all ideas on how to fix their broken system."
And the GMB union said the probation officers it represented were overworked and demoralised.
GMB national officer George Georgiou said: "Fragmenting the service has moved us away from a coherent national workforce strategy for the entire probation service."
But the government's proposals were welcomed by the chief probation inspector, Dame Glenys Stacey.
Dame Glenys, who was critical of probation services in her report in December, said: "There is much to welcome in these proposals, and we are pleased to see that our inspection evidence and findings and our wider advice have had significant influence and impact."