Plans for a new women's jail in Inverclyde have been scrapped.
It follows criticism of the £75m plan to replace Scotland's women-only prison, Cornton Vale in Stirling.
Holyrood's Justice Secretary Michael Matheson said Scotland must take a more radical and ambitious approach to female offending.
Opposition parties, which had lobbied for the scheme not to go ahead, welcomed the Scottish government's announcement.
Scotland's deputy Labour leader, Kezia Dugdale, said the U-turn was a "sensible decision" and the Scottish Liberal Democrat's justice spokeswoman, Alison McInnes, said she was pleased the minister had "listened to the voices of reformers".
The Scottish government will now consult on a plan to provide smaller regional and community-based custodial facilities across the country.
In the two months since he became minister, Mr Matheson has been scrutinising the plans for the proposed prison in Greenock which was to be built on a former high school site.
It was the idea of his predecessor, Kenny MacAskill, so that Cornton Vale could close in 2018.
But the move was criticised by opposition parties and prison reform groups who said it ran counter to recommendations by the former Lord Advocate Dame Eilish Angiolini that female offending should be tackled with small regional units.
Mr Matheson said he had been studying the current plans and listening to views expressed by a number of key interest groups.
He said: "It does not fit with my vision of how a modern and progressive country should be addressing female offending.
"We need to be bolder and take a more radical and ambitious approach in Scotland.
"When it comes to the justice system, we must be smarter with the choices we make and be more sophisticated in the way in which we deal with female offenders."
The government said it would now undertake a period of "extensive engagement with key partners" including the Scottish Prison Service with a view to investing in smaller regional and community-based custodial facilities across the country.
The proposals will also consider whether there is scope for a smaller facility within the prison estate for the low number of serious female offenders who pose a risk to the community and are given long-term prison sentences.
Cornton Vale was built in 1975 and has capacity for 307 women.
A refurbishment programme was completed in September 2014 and included a new family-friendly "visitor hub".
But it has had a notorious history, being nicknamed "the vale of death" after 11 prisoners killed themselves there between 1995 and 2002.
Despite attempts to improve conditions, ministers decided it would close after Dame Elish's 2012 report said it was "not fit for purpose".
Mr Matheson made his announcement on a visit to the 218 Centre in Glasgow, the only facility of its kind in Scotland.
Operated by the charity Turning Point Scotland, it has a 12-bed residential unit and a day service programme providing a range of compulsory and optional group work sessions and one-to-one support.
It is designed to offer an alternative to court proceedings for women offenders.
Access is also available to a clinic which deals with mental and physical health issues, a dietician, chiropodist, dentist, doctors and nurses.
Martin Cawley, Chief Executive, Turning Point Scotland said: "Community based alternatives to custody, like 218, support women to make positive changes in their lives by providing a safe, structured environment to help them improve health and wellbeing and address many of the underlying issues that contribute towards their offending, such as substance misuse issues.
"Many of the women using the service have a range of complex needs such as addiction, poor mental or physical health and trauma issues.
"By addressing these underlying issues, it reduces the likelihood of them reoffending in future."
A further £3m is being invested by the Scottish government in 2013-15 to support the development of 16 projects delivering new or enhanced services for women offenders across Scotland.
- the expansion of services for female offenders in Edinburgh and Dundee
- developing new facilities in North Lanarkshire, Renfrewshire and Highlands
- and outreach services engaging women offenders in Fife, Angus, South Lanarkshire, Forth Valley.
The Scottish Labour Party had announced it would try to force a vote in Holyrood on the issue.
Following the government's decision to scrap the scheme, Ms Dugdale said: "We must make sure adequate resources are made available for the schemes around the country which provide an alternative to imprisonment for vulnerable women.
"In the vast majority of cases that's simply not the best way to deal with them."
Women for Independence, which campaigned to stop the prison from being built, said it was delighted with the Scottish government's announcement.
Spokeswoman, Maggie Mellon, said: "We look forward to building a different and more progressive justice system for women in Scotland.
"We would also like to congratulate Mr Matheson [Scottish justice secretary] for listening to those opposed to the new prison and for having the courage to change course on this issue.
"Despite undoubted pressure, he has shown courage, confidence and principles to do the right thing for some of Scotland's most vulnerable women."