The Corrections Department has confirmed plans to take over Serco's management of Mt Eden Correctional Facility.
Corrections Minister Peseta Sam Lotu-Iiga said this afternoon that a management team would take over the day to day running of the prison from Monday "for the immediate future".
Serco's staff would remain on site, but a Corrections Department Prison Director and their team would oversee the prison.
At a press conference this afternoon, Mr Lotu-Iiga reiterated that Mt Eden Correctional Facility was a difficult prison to run because of its remand status and transient population.
"But it's important that the public of New Zealand has confidence in our prison system," he said.
The minister said Corrections' intervention was not a signal of no-confidence in Serco, and the company's management of Wiri Prison in South Auckland would not be affected by the events at Mt Eden.
Corrections Chief Executive Ray Smith also said Serco could also face financial penalties for issues which have emerged over the last week, which include reports of fighting and drug use.
"These are likely to be substantial," he said.
"There are also other options potentially available to me under the contract. These include a Final Warning and Early Termination of the contract.
"I have not taken these options at this stage and will wait the outcome of the Chief Inspector's review and consider its findings before proceeding further."
The Government's contract with Serco included a "step in" clause which allowed it to take over the management of Mt Eden for an undefined period.
Mr Smith said he would determine how long the "stepping in" process would last for.
Serco's 10 year contract allowed for a review after six years, and this review was already underway.
The prison operator would continue to pay staff the prison, and the company would also pay the additional costs of the Corrections staff who were called in to assist.
Mr Smith said he considered giving Serco a final warning, but he believed it was important at this stage to change the prison's leadership and wait for several investigations to be completed.
"And then at the end of that there's another conversation to be had ... with Serco about the continuation of the contract.
"I think this is salvageable. I think we've just got to get some good people in there helping their staff to lift the standard of operating in that prison."
Mr Smith said all 18 prisons in New Zealand were potentially volatile places, but allegations of fight clubs and other incidents at Mt Eden were beyond the norm.
"There's been rumours about these things for a long time and we've never had the footage that way.
"There will continue to be volatile incidents. But that's quite different from people being required to participate in fight clubs."
"That's no ok, it's not anything that anyone in Corrections would think is ok, ever. And it's very distressing to see it."
Mr Lotu-Iiga and Mr Smith met this morning after a week in which Serco's management of the prison was called into question.
Videos have emerged of prisoners fighting and using drugs in their cells, and allegations have been made in Parliament about mistreatment of prisoners.
Mr Smith said last night he would take "firmer steps" to address Serco's problems, and was seeking legal advice about the way forward.
His comments came after a fresh allegation of violence at Mt Eden Correctional Facility was revealed yesterday, just hours after Serco bosses had been hauled in to explain the recent events at the jail.
A prisoner who transferred from Mt Eden to another prison arrived with injuries, and made "serious allegations" about his treatment at the Serco-run jail.
That case had echoes of Nick Evans, who was transferred from Mt Eden to Ngawha Prison with injuries earlier this year and later died at Whangarei Hospital.
Labour MP Kelvin Davis alleged that Evans' injuries were consistent with a fall from a large height, and said he had been thrown off a balcony by inmates.
As part of Serco's contract, Government has power to step in and manage the prison either on a temporary or permanent basis.