Lindholme Immigration Removal Centre, which is next to HMP Lindholme in South Yorkshire, was designed to house people who had attempted to enter the country illegally.
But a new report by an independent watchdog reveals it is now mainly used for so-called "sentence expired" prisoners, who are transferred in from the neighbouring jail.
It costs 25,000 a year to keep a detainee at the centre and at least one former inmate has been kept for more than two years because of problems with his "immigration status".
Detainees cannot be released because they are not entitled to stay in the UK but cannot be deported because of delays in ascertaining where they should be returned to.
Facilities on the site, converted from a former RAF officers' mess, include an activities centre, fitness suite and library. Each detainee has their own room and key and their own television.
Until recently, around 90 per cent of the 124 detainees were foreign offenders who had committed crimes in Britain, but recent work has seen that reduced to around 60 per cent.
Serious worries about the situation have been raised by the Independent Monitoring Board for HMP Lindholme, which also oversees the removal centre.
Chairman Ben Bradley said the board felt criminals should be dealt with by immigration officials while in prison so they were immediately deported at the end of their sentence.
He added: "We are extremely concerned at the amount of foreign national prisoners in the immigration centre. In total, 24 have been in there for more than six months.
"It costs around 25,000 per year for each detainee so it could save the taxpayer money if there was some work done. "
Misgivings raised by the board, which is appointed by the Government, are spelled out in detail in two annual reports.
In the report on the prison, it says: "One of our major concerns is the length of time it takes to process the legal documentation designed to remove foreign national prisoners from our shores."
This is expanded upon in the report on the centre which says: "The board would wish to highlight again its concern at the numbers of ex-foreign national prisoners having served their sentences and now held as detainees in the centre.
"We are pleased to note that there has been a reduction from 90 per cent to 60 per cent of current population. We would hope that every effort continues to be made to resolve the immigration status of prisoners whilst they are still in the prison estate."
Concerns are also raised about how the prison and removal centre will cope if coalition plans to reduce the number of jail places to save money come to fruition.
Tory MP Philip Davies, who recently warned Justice Secretary Kenneth Clarke that a reduction prison places was "out of step" with ordinary voters, said the situation was a "shambles".
The Shipley MP said: "I think this is an absolute disgrace and I would echo the concerns raised by Lindholme's Independent Monitoring Board.
"If they do serve their sentences in this country, there is absolutely no excuse for them to be lounging around in an immigration centre at the taxpayers' expense – they should be deported."
The latest Home Office figures show there are a total of 85,184 people in prison, and 11,367 of those are foreign nationals while a further 2,805 are "nationality not recorded".
Alan Kittle, director of detention services for the UK Border Agency, said: "We welcome the report's findings that there has been a significant reduction in the foreign national prisoner population at Lindholme Immigration Removal Centre.
"The UK Border Agency has continued to improve its processes for deporting foreign nationals who have committed serious crimes. However, where a detainee refuses to co-operate with the removal or deportation process, detention may be unavoidably prolonged."
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