Prisoners will be given 12 months to quit cigarettes, with a smoking ban in prisons to kick in next July.
Corrections Minister Judith Collins announced the policy today, saying smokefree prisons will be safer and healthier.
Prisoners would be given information, education and support over 12 months to help them quit, Ms Collins said.
"The high level of smoking in our prisons poses a serious health risk to staff and prisoners. Studies of air quality in US prisons show that staff and prisoners can be exposed to 12 times the levels of second hand smoke than in the home of an indoor smoker," she said.
Lighters would also be taken away, she said.
"Lighters are used to melt toothbrushes and plastic utensils into dangerous weapons.
"Prisoners also light balls of toilet paper to throw at Corrections staff and set fire to Corrections property. Staff shouldn't have to put up with it."
Meanwhile, a Northland mayor has said the ban could lead to a reduction in crime, amid warnings that guards and inmates would face added pressures and need more resources to cope.
Prime Minister John Key said that prisoners' access to lighters and second-hand smoke were major reasons to impose a ban.
There were concerns prison guards and other inmates could take legal action claiming second-hand smoke made them sick, he said.
Whangarei Mayor Stan Semenoff, who has been advocating smokefree prisons since March, said crime rates could drop as a result of the policy.
A smoking ban at a prison on Britain's Isle of Man had become a deterrent for reforming criminals who couldn't face prison terms without smoking, Mr Semenoff said.
The drop in crime has been reported by British media, including the Telegraph, which said the crime rate on the island had fallen by 14 per cent and burglary by 35 per cent.
"It's a standing joke now that when we nick someone we remind them that if they get sent down they'll have to come off the cigarettes - their faces are a picture," a police source told the newspaper in December.
"It's like they are more scared about giving up smoking than a criminal record and some time in the nick."
Many, however, have warned of the added pressures a ban would place on guards and inmates.
Green Party corrections spokesman David Clendon told Newstalk ZB that such a policy would have to be implemented carefully with extra help for inmates to quit.