The firm at the centre of the Olympics security shambles has been stripped of its responsibilities for running Britain’s first private jail.

G4S, which failed to provide enough guards for the London 2012 games, will stop running the Wolds prison in East Yorkshire, which will return to the public sector from next year, the Ministry of Justice (MoJ) said.

The firm, which also lost the other prison contracts it was bidding for, saw its shares plummet more than 3%, making it the second biggest faller on the FTSE 100 Index with more than £100 million wiped from its value.

But in a surprise move, Justice Secretary Chris Grayling also announced a new approach to prison privatisation.

Private firms will be brought in to all public prisons to run maintenance, resettlement and possibly catering in a move which could save up to £450 million over the next six years.

It amounts to the end of competition for prison management between the public and private sector for the time being, the Reform think-tank said.

Andrew Haldenby, its director, said: “This is a dramatic U-turn which calls into question the Government’s whole approach to improving public services.

“Competition has improved the prisons environment for both prisoners and staff.

“It has worked successfully for two decades under successive governments.”

Mr Grayling said the new approach would “lead to better value for the tax-payer, linked to more effective services to reduce reoffending”.

“The cost of running our prisons is too high and must be reduced,” he said.

“We can do this by being more innovative and efficient, and without compromising public safety.”

But he insisted the move “does not rule out further prison-by-prison competitions in the future”.

Ministers also announced that competitions to run Northumberland prison, an amalgamation of Acklington and Castington jails, and a trio of South Yorkshire jails – Lindholme, Hatfield and Moorland – will now move to the final stage, with the two contracts likely to be awarded to either Sodexo, Serco or MTC/Amey next spring.

Their bids “produced a compelling package of reforms for delivering cost reduction, improvements to regimes and a working prisons model in these prisons”, the MoJ said.

But this was not the case for the Wolds prison in East Yorkshire, which is currently run by G4S; Coldingley prison in Surrey; Onley in Northamptonshire, or Durham jail, the ministry added.

The Wolds prison, a category C training prison holding up to 395 men, has been run by G4S since it opened in 1992, but will return to the public sector next July.

The move comes after inspectors raised concerns over “the availability of drugs, a lack of staff confidence in confronting poor behaviour, weaknesses in the promotion of diversity and limited work and training provision”.

A G4S spokeswoman said she was “disappointed” by the announcements.

“Our performance across all six prisons we run has been to a high standard with every aspect of performance either meeting or exceeding the key performance indicators applied by the MoJ,” she added.

Ministers denied the decision had anything to do with the company’s failures in the Olympics security contract this summer.

“We’ve assessed all of these bids on their merits and not on the basis of who is making the bid,” prisons minister Jeremy Wright told BBC News.

“This is a consideration we’ve made entirely aside from what happened to G4S at the Olympics.”

Juliet Lyon, director of the Prison Reform Trust, said: “On the evidence of deteriorating conditions at the Wolds, Britain’s first private jail, it looks like trusting G4S to run theprison was a risk too far for justice ministers.”

Frances Crook, chief executive of the Howard League for Penal Reform, added the Government’s decision to hand over prisons to the private sector was “a mistake of Olympic proportions”.

“The Government will seek to deflect criticism of its prison privatisation programme by excluding G4S from the next stage of the bidding process, but the principle of awarding lucrative contracts to private companies running prisons on the cheap remains unchallenged,” she said.

“Something as important as taking away someone’s freedom should only be done by the state, answerable to taxpayers, rather than by international private security firms, answerable only to their shareholders.”

Mark Serwotka, general secretary of the Public and Commercial Services (PCS) union, added it was “morally reprehensible that companies are profiting from locking people up”.

Beleaguered security firm and private prisons company G4S suffered a loss of £200 in the last week alone and there are fear of further falls amid fears that the Olympics debacle will damage its reputation even more.

Its shares fell 3% on top of similar falls yesterday, meaning more than £200 million has been wiped off its value since the staffing problems emerged.

The company was in the news only a few months ago when its flagship 1600-place Oakwood prison only held 45 prisoners a month after it opened because is kept breaking down.

Meanwhile, there are fears that chief executive Nick Buckles, who will be hauled before MPs next week, will be forced out.

He survived the collapse of a £5.2 billion takeover deal for Danish cleaning giant ISS last year after a shareholder rebellion scuppered the move, but the latest debacle has put his position under renewed pressure.

Seymour Pierce analyst Caroline de La Soujeole said: “In terms of numbers, the Olympics won’t make much difference to people’s full-year forecasts. Financially, it’s nothing significant.

“People are not worried about numbers but about impact on reputation, which is hard to quantify.

“Potentially, there’s a danger it could lose further contracts. And there is the question is that the end for Nick Buckles?”

G4S’s revenues hit £7.5 billion last year, while underlying profits grew 2% to £531 million and analysts said any shortfall from the Olympics contract would not hurt the company.

Ms de La Soujeole believes the company’s growth prospects remain strong because it is set to benefit from the public sector’s austerity drive as more authorities look to outsource work.

Last year, for example, G4S started running Birmingham prison, and a contract to run Oakwood prison in Wolverhampton started in April.

And G4S won a ground-breaking £200 million contract to design and run a station for Lincolnshire Police, including running cells, administering drug tests and managing the force’s vehicle fleet.

Ms de La Soujeole said: “The Government has to cut costs, which it will do by outsourcing, and G4S is a key player in that market.

“There are not that many players out there with the scale of G4S to run things like prisons.

“Once the dust has settled it should be business as usual.”

Shares in G4S closed down 1.5% today, or off 4.3p to 278.7p. That means more than £150 million has been wiped off the company’s market value over the past two days.

CONVERSE EXCLUSIVE!

Britain’s newest jail, the £150 million HMP Oakwood at Wolverhampton in the West Midlands is beginning to break down just four weeks after it was opened.

Sources at the jail told Converse, the national newspaper for prisoners in England and Wales that a month after it opened the 1600-place prison still has only 45 prisoners and its systems have already broken down.

Mark Leech, Editor of Converse said: “We are getting many letters from prisoners at Ryehill Prison near Rugby, which like HMP Oakwood is owned and operated by private prisons company G4S, who having been told they were going to be transferred to Oakwood have now been told the move is off and they have been shunted to other prisons around the region because of systems failures at the new jail.

“Sources at the prison have told us that the electrics are a mess, every time they switch on the lights the system trips off, the showers in each cell keep coming on automatically even though no one is locked in them, and as a result of the water and power failures food for the prison is being brought in from a private contractor instead of being cooked in the £7 million state-of-the-art kitchen – staff at the prison have told me its a shambles.”

The jail hit the headlines last month when it was revealed that sex offenders at the prison would be allowed out on local leave, a fact which had been hidden from residents.

No-one at HMP Oakwood was available for comment.