Britain’s senior judge gave warning last night that the Ministry of Justice announced yesterday risks “recurrent crisis”, with the judiciary under pressure to tailor sentences to the number of prison spaces.

Lord Phillips of Worth Matravers, the Lord Chief Justice, said prison overcrowding could hit the resources available for the courts and legal aid.

He spoke as the prison population hit an-all time record of 80,193 — a figure that underlines the huge problems that the new ministry will inherit from the Home Office. There is still no agreement on the amount of cash the ministry will receive from the Home Office to fund an 8,000-place prison building programme.

Lord Phillips’s warning about the threat to the legal aid and courts budget reinforced fears among police and backbench MPs that the ministry will effectively be little more than a department for judges and law-yers.Part of a Government shake-up intended to improve Britain’s counter-terrorism effort, it will start work in May.

A slimmed-down Home Office will focus on terrorism, security, immigration and identity cards, handing over prisons, probation and criminal justice to the Ministry of Justice.

But the division of the 225-year-old Home Office was dismissed by Charles Clarke, a former Home Secretary, as irresponsible. The Conservatives said that it would “compound” existing problems.

Lord Phillips said that he had no objection in principle to the creation of a Ministry of Justice, but he called for a public debate on “the continuing problems of prison overcrowding and the availability of resources to provide the sentences imposed by the courts”. Without such a debate, he said, there was a risk that the new ministry would be faced with a “situation of recurrent crisis, or judges will be placed under pressure to impose sentences that they do not believe are appropriate”.

Ken Jones, President of the Association of Chief Police Officers, said that the split could make it harder for police to work with others, such as probation officers, in the criminal justice system .

He also cautioned against the two ministries setting out competing demands. “The police service works closely from top to bottom with criminal justice agencies and the link particularly with prisons and probation teams must not be broken,” he said.

“The demands made by one ministry will undoubtedly affect the other, and we need to ensure that the consequences of one ministry’s policy are understood and deliverable by all.”

The slimmed-down Home Office will absorb counter-terrorism strategy from the Cabinet Office, with the creation of an Office for Security and Counter-Terrorism.

John Reid, the Home Secretary, said that the changes were needed to focus on “the challenges of today’s world and the priorities of today’s people”.

He told MPs that, although Lord Falconer of Thoroton, QC, would remain as head of the new department in the interim, he would not be Secretary of State for Justice in the long term.

Downing Street sources indicated that it was considered “untenable” for a peer to head the new ministry. Last night Geoff Hoon, a lawyer, emerged as favourite if Gordon Brown becomes Prime Minister.

In a written statement to the House of Commons, Tony Blair said that Britain’s counter-terrorism capabilities were “the best in the world” but still needed to be improved, and these changes were designed to provide a “step change”.

He was strengthening the Home Secretary’s role to give him the lead responsibility for dealing with threats to Britain, “including their overseas dimension”.

However, other ministers, including the Foreign Secretary, Defence Secretary and the Secretary of State for Communities and Local Government, would still have responsibilities with a national security committee, chaired by the Prime Minister, bringing all the key figures together once a month.

The 350-strong Office for Security and Counter-Terror-ism is to be established in the Home Office and a Ministerial Committee on Security and Terrorism will be chaired by the Prime Minister.

Mr Reid’s counter-terrorism duties are to be bolstered by a new propaganda unit in the Home Office, which will be responsible for research, information and communications “in support of the struggle for ideas and values”.

Mr Blair said that there would be a Secretary of State for Justice in charge of the new ministry, but the Home Secretary would retain a “core role” in decision-making on criminal law and sentencing policy.

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