Justice minister Maria Eagle has accepted that there is a shortage of prison places in North Wales.
Appearing before the Welsh affairs committee this morning, she said that there was a shortfall of about 1,500 places.
But she said the government still wished to build a new prison in the region, despite scrapping plans to build an 800 place facility in Caernarfon.
The Caernarfon plan was dropped after the ministry of justice found the plans to be too expensive.
Eagle acknowledged that "with hindsight" the announcement of the site prior to the department conducting due diligence had unfairly raised expectations.
"Our due diligence process, which commenced after site was announced as our preferred site, threw up issues which were more serious than had been anticipated," she said.
"For example we knew there was contamination on the site before the examination but we didn’t have a full picture," she added.
Eagle said the costs of cleaning up the site meant it was not suitable for a prison.
John Aspinall, director of capacity at the National Offender Management Service, told the committee that there were a "whole range" of contaminants at the site including asbestos.
Eagle told the committee that the government remained committed to extending the available prison places to 96,000 by 2014.
"All our developments are part of the plan to get to that level," she said.
She said that the 800 place prison that was to be built at Caernarfon would have made a contribution to that commitment.
But she said part of the plan was to "overbuild" in order to remove some unsuitable places from the current stock.
On current bids for new prisons she said the ministry of justice was looking at bids for 1,500 place prisons, on sites of "at least" 35 acres
