Intensive Fostering will be available as part of a supervision order.
Young offenders will stay with foster carers for up to a year and work will be done with their families to help them return.
Announcing the plan at the Labour Party conference, Home Secretary David Blunkett said: "For some young offenders, a difficult home life can directly contribute to offending behaviour. Fostering will provide these young people with the safety and stability they need."
Lisa Nandy, policy officer at social exclusion charity Centrepoint, said it is good that the Government is looking at alternatives to custody, but that the compulsory nature of the scheme might reduce its effectiveness.
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