The first stage in setting up a national service to divert mentally ill people from prison is due to be announced by the health secretary, Andrew Lansley, and the justice secretary, Ken Clarke.

The two cabinet ministers are to announce they have found £5m to put into 100 "diversion sites" across England and Wales as part of their plan to create a national liaison and diversion service by 2014.

The decision is part of Clarke's plans for a radical restructuring of sentencing and the prison system, with the money coming mainly from the health budget as the justice ministry grapples with a 23% cut in its spending.

Clarke's green paper, Breaking the Cycle, recognises that the justice system is not always the best place to manage the problems of less serious offenders where their criminal behaviour is related to their mental health problems. A prison service survey published in November revealed that 12% of inmates had a mental illness or depression as a longstanding illness.

The justice ministry says there are currently some limited liaison and diversion services in place around the country, in which health staff are placed at police stations or in courts to screen and assess people for mental health problems. They refer offenders to health services rather than prison or probation, but they are not consistently available.

Lansley will announce that £3m is to be spent creating up to a further 40 diversion sites for adults and £2m for up to a further 60 sites for young people this year. They hope it will be a national service by 2014.

Clarke and Lansley are to make their announcement at a Westminster reception with the Women's Institute and the Prison Reform Trust. The WI launched a "care, not custody" campaign three years ago after the death in Manchester prison of a Norfolk WI member's mentally ill son who had suffered a nervous breakdown while studying for a Phd in astrophysics.

Lansley said each death in custody was a tragedy for those involved and that active steps were being taken to ensure offenders got the same quality healthcare in prison as they would in the community.

"Ensuring the health needs of offenders are identified promptly will help the police and courts to make informed decisions about charging and sentencing," he said. "But we also need to ensure that the right treatment is available. We know early intervention and prevention is essential and that more needs to be done to divert offenders with mental health problems away from prison and into community-based health treatment."

Ruth Bond, the WI chair, said their campaign aimed to ensure a higher level of co-operation between the health and justice sectors. She welcomed the announcement but said the WI would be vigilant to ensure there was "sufficient political might" behind the government's commitments.

Juliet Lyon, of the Prison Reform Trust, said: "When a highly respected organisation like the WI looks at the dark, neglected world of prisons and highlights the plight of people who are mentally ill then things start changing for the better."