Prisons in England and Wales could become more unstable as a result of Government cuts, the Chief Inspector of Prisons warned.
Dame Anne Owers warned of "hidden pressures" within the "fragile" penal system.
Budget cuts could also mean fewer prisoners being rehabilitated, she warned in her annual report.
"As the population expands, resources are already under increased threat," she wrote. "The cuts already announced for next year come on top of an already sliced budget, with the possibility of even more cuts later.
"The hidden and incremental pressures this produces should not be underestimated...there are two risks: of increased instability in fragile environments and of reducing prisons' capacity to rehabilitate those they hold."
Dame Anne, who is leaving her post this year after eight years, said overall prisons were in better shape than when she took over the job. But she warned they were now being urged to aim for the average because of a lack of funds.
A prison service "benchmarking" process tells jails to aim for the "bronze standard" instead of trying to be excellent, she warned. This "regression to the mean" will lead to less activity and fewer work opportunities for inmates - and could demoralise staff, she said.
Only four out of 34 "closed" prisons scored well in activities for inmates in inspection reports last year.
The annual report for 2008-9 also points to concerns about levels of self harm, particularly among women prisoners. Holloway women's prison recorded 331 incidents in a single month - more than 10 a day.
As a result of the scandal over difficult prisoners being moved between jails in advance of inspectors' arrival, more inspections will be unannounced in future, she said.
