The Ashley Youth Detention Centre will close in three years' time.
Premier Peter Gutwein on Thursday said despite the best intentions of staff and management at the centre, it would continue to be stigmatised.
He said there was a need to systemic change and a new approach.
"Personally I've long held the concern that the allegations of historical abuse and the ongoing speculation around Ashley is not conducive to achieving the best-practice outcomes that we strive for," Mr Gutwein said.
"The events of this week have firmed in my mind that despite the best intentions of management and staff, the centre will continue be stigmatised and constrained in terms of the outcomes it can achieve for young people."
Mr Gutwein said two new facilities - one in the North and one in the South - would be build to house young offenders.
He said these facilities would have better links to family and service providers.
"The new model will ensure young people have access to the right support at the right time," Mr Gutwein said.
"I believe coupled with preventative strategies, it will give young people a far better chance to engage with support that they need so they are in a better position to rehabilate."
He said construction of new facilities would be undertaken in the next two years and Ashley would close in three years' time. The government will begin searching for appropriate sites.
There have also been a series of allegations regarding the centre - including historic sexual abuse, with a former detainee taking action in the Supreme Court - and repeated concerns raised by the Custodial Inspector.
The decision comes after he met with Ashley clinical practice consultant Alysha for over two hours on Wednesday, who detailed her fears for the safety of children in the centre.
Closure of Ashley was one of four options put forward following the Noetic Report into youth justice in 2016, but the government chose another option of retaining it, but with upgrades.
Earlier this year, a further $7.3 million in upgrades started, which will run their course.
A decision on the future of the Ashley site will be made in the coming years. Mr Gutwein would not be drawn on whether it could house an adult system, rather than building a new one near Westbury.
Childrens' Minister Sarah Courtney said the new youth justice centres would have a preventative focus.
"We want to support children and families, engage young people at-risk early, and direct them away from the youth justice system," she said.
"We do sadly need to have a custodial youth facility in Tasmania. This is about making sure that it's part of a broader suite of initiatives that we will be implementing across youth justice."
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