Prime Minister Tony Blair vetoed measures aimed at heading off a summer prison overcrowding crisis, it has been claimed.
On Wednesday, the Department for Constitutional Affairs will become the Ministry of Justice which will also run the prison and probation services.
Lord Falconer, who will head the Ministry of Justice, proposed reducing the use of custody for less serious offences.
Among the plans was a move to abolish imprisonment for those caught shoplifting goods valued at less than £200, The Times newspaper reported.
Other proposals included shorter sentences for non-violent crimes and restricting the use of suspended sentences, the paper said.
But the Department for Constitutional Affairs (DCA) denied any rift between the PM and Lord Falconer. A spokeswoman said: "Lord Falconer and the Prime Minister do not disagree and you will have to wait until May 9 for Ministry of Justice policies."
At the weekend, Lord Falconer denied claims he was poised to grant thousands of prisoners early release to ease prison overcrowding.
A report in The Observer that one of his first acts would be to release 3,000 prisoners was "simply wrong", he said.
He added that he would not announce prison policy before taking over control at the Ministry of Justice.
Overcrowding is a political hot potato as ministers struggle to accommodate the growing prison population. Last month it was claimed that overcrowding was costing the UK taxpayer almost £5m a month in payments for emergency space in police cells.
