Once legal fees are added to the payout, due to be rubber-stamped at the High Court this morning, the total bill to the taxpayer is likely to smash through the ?1m barrier.
The Home Office said it had "reluctantly" agreed to pay-up to minimise costs to the public. If the case had reached court, the inmates could have been granted even more cash, officials said.
Shadow Home Secretary David Davis said: "In the light of this John Reid must now explain to the public why exactly he collapsed in the face of pressure.
"Proper, effective and sustained rehabilitation programs are vital to ensure that prisons have a purpose and can actually help prepare offenders for a life free of crime and the misery of drugs.
"If the Government continues to fold in this way the drug situation will only deteriorate. The Home Secretary must explain to the public why he is prepared to waste so much taxpayers' money and sacrifice such a worthy cause."
The compensation scandal, first revealed by the Daily Mail yesterday, centres on 198 prisoners who were receiving treatment to help them kick hard drug addictions.
They had been receiving drugs such as methadone, paid for by the Government. But a decision was taken by the prison service that - rather than continue to be given drugs - they should be made to go through "cold turkey" detox instead.
The criminals - funded by legal aid - argued this was unlawful under Labour's Human Rights Act and should count as "torture" or "degrading treatment".
Even though all the drugs the offenders were addicted to were illegal, they argued that the prison system had no right to make them stop, or to put them through detox programmes without their consent.
Yesterday, the Home Office confirmed it had capitulated in six test cases. The rest of the claimants will be offered payments as well.
Sources said the average payment would be ?3,500 each. One of the claimants has since died, leaving 197 to share a total windfall of ?689,500. Legal costs will also be met by the taxpayer.
Ann Widdecombe, former prisons minister, said: "This is human rights gone completely mad."
Norman Brennan of the Victims of Crime Trust said: 'This case loses sight of the fact that taking drugs is illegal, and these prisoners took drugs of their own accord and broke the law to fund their habits.
"The Human Rights Convention was set up after the war in response to Nazi atrocities. It is disgraceful that 60 years later the Human Rights Act is benefiting offenders bringing such frivolous claims."
All of the prisoners in-line for payments are entitled to remain anonymous, as the Home office settled before it reached a full hearing.
Ministers will formally acknowledge defeat in front of High Court judge Justice Langstaff at 10.30am today.
At a preliminary hearing in May their barrister Richard Hermer, a human rights lawyer specialising in group actions against the Government, told the court: "Many of the prisoners were receiving methadone treatment before they entered prison and were upset at the short period of treatment using opiates they encountered in jail.
"Imposing the short, sharp detoxification is the issue."
The addicts said their treatment was handled "inappropriately" so that they "suffered injuries" and had "difficulties" with their withdrawal.
And they insisted they were the victims of "trespass" in the form of unwanted treatment, accusing the Prison Service of clinical negligence.
They also claimed human rights breaches under Articles 3 and 14 of the European Convention on Human Rights, which ban discrimination, torture or inhuman or degrading treatment or punishment and Article 8, which enshrines the right to respect for private life.
In a further blow, it last night emerged hundreds of thousands pounds of taxpayers' cash has already been blown on housing convicts in police cells.
In the past month, criminals have spent almost 1,000 nights in police stations because there is no room in prison.
The Conservatives said the cost exercise, known as Operation Safeguard, could be as much as ?1,000-a-night in some cases - which would give a total of ?1m.
Police sources put the average nightly bill at closer to ?350, which would still mean the Government has forked out ?338,000 because of its failure to provide enough jail spaces.
Shadow Immigration Minister, Damian Green said: "These figures highlight the ridiculous waste of money taxpayers as a result of this Government's incompetence. If we had a system that worked, there would be no need to resort to the use of police cells. How much longer must the public pick up the cost of this chaos?"
Prisoners are likely to reamin in police stations for weeks to come, sending the bill soaring.