Background: Currently, mental health is an important public health problem and the leading cause of disability worldwide. Studies have shown that, mental illnesses are more common among the prison population than the general population. However, still there is no accurate count of persons with mental disorder who are incarcerated in Ethiopia and information about prisoners' health conditions is scarce. The purpose of this study was to assess the prevalence and associated factors of psychological distress among prisoner inmates found in prisons of Northwest, Ethiopia. Methods: Institution based cross sectional study was conducted among 649 prisoners from January to February 2015. Multistage sampling technique was used to select the study participants. Data were collected by using a structured interviewer administered questionnaire. Psychological distress was measured using the Kessler Psychological Distress Scale (K10). Receiver Operating Characteristic curve (ROC curve) analysis was done by STATA version 12 software in order to determine a cutoff point with high sensitivity and specificity. Bivariate and multivariable logistic regression models were fitted to identify associated factors. Adjusted odds ratio with its 95 % Confidence interval was used to declare the statistical significance between psychological distress and associated factors. Results: Prevalence of psychological distress among prisoners was found to be 83.4 % (95 % CI 80.6, 86.0 %). Long duration of stay in the prison (AOR = 0.95; 95 % CI 0.89-0.97), low to no satisfaction with prison services (AOR = 3.01; 95 % CI 1.38-6.51), and place of prison were factors significantly associated with psychological distress among prisoners. Conclusion: The prevalence of psychological distress among prisoners was found to be very high. Due attention needs to be given in addressing the mental health needs of the prisoners.