Convicted criminals jailed for less than six months for non-violent crimes should be made to do community service instead, politicians said.
Remission for good behaviour behind bars should also be increased from a quarter to one third of a sentence in a bid to reduce Ireland's prison population, they claimed.
The cross party Oireachtas committee recommended that government cut the number of inmates by a third over 10 years through a range of measures.
David Stanton, chairman of the justice, defence and equality committee, said members were concerned about the significant increase in the numbers of prisoners in recent years.
"We strongly recommend the adoption of a 'decarceration strategy', a declared intention by the Government to reduce the prison population by one-third over a 10-year period," he said.
Almost 4,250 inmates are in custody in prisons across Ireland. Capacity has increased to 4,430 since a new wing opened in the Midlands last year but concerns are still being raised about chronic overcrowding by campaigners.
The report on penal reform, produced by Senator Ivana Bacik, called for an incentivised remission scheme of up to one half of a sentence in certain cases and for legislation on structured release, temporary release, parole and community return.
Prison conditions, overcrowding and increasing the use of open prisons also need to be addressed, she said. The Irish Penal Reform Trust (IPRT), which last year issued a range of similar measures, called on government to adopt the recommendations.
Liam Herrick, IPRT executive director, said a major obstacle to penal reform in the past has been the politicisation of crime policy.
"It is very significant that we now have cross-party consensus on what needs to change in the wider penal system in order to make the system effective, efficient and to reduce re-offending after release," he said.