Plans to build a new mega-prison at Waikeria have been scrapped, but the government has yet to decide what to do instead.
The Corrections Department is waiting for the government to report back on its proposal to build a 3000-bed prison in rural Waikato.
It would be the largest prison in the country.
The government has repeatedly delayed its response, but Corrections Minister Kelvin Davis confirmed on Sunday that the large-scale option had been taken off the table.
"We will not be building a mega prison," he said in a statement.
However, he left the door open to a smaller expansion, saying a final decision on the proposal was still pending.
"We will take action, but it will be considered and not reactive... I will be making a decision, but I want to make the right one for all those affected."
New Zealand is grappling with a ballooning prison population. The prison muster is just under 11,000 - nearly double the number of 20 years ago.
Mr Davis said he would thoroughly consider all the options to deal with the "capacity crisis" alongside Justice Minister Andrew Little and Police Minister Stuart Nash.
In recent months, the government has signalled it did not favour the mega-prison option.
Last month, Mr Little said Cabinet was seriously considering alternatives including smaller prisons closer to communities.
Last week's Budget included $200 million to set up temporary prison units to house 600 prisoners by the end of next year.
In response, the union representing prison staff said that would not be enough and warned morale was at an all-time low.
The Public Service Association (PSA) called on Mr Davis to "make a definitive statement" about his plans for Waikeria.
PSA spokesperson Willie Cochrane said he was still none the wiser and hoped for a clear decision "as soon as possible".
"Waikeria is in absolute drastic need for upgrading and modernising to allow for better rehabilitative services and more safety for staff.
"We are absolutely waiting with bated breath to hear back what the ideas are."
The government has committed to cutting the prison population by 30 percent in 15 years.