Recent rises in incident tuberculosis (TB) cases in Paraguay and the increasing concentration of TB within prisons highlight the urgency of targeting strategies to interrupt transmission and prevent new infections. However, whether specific cities or carceral institutions play a disproportionate role in transmission remains unknown. We conducted prospective genomic surveillance, sequencing 471 M. tuberculosis genomes, from inside and outside prisons in Paraguay's two largest urban areas, Asuncion and Ciudad del Este, from 2016 to 2021. We found genomic evidence of frequent recent transmission within prisons and transmission linkages spanning prisons and surrounding populations. We identified a signal of frequent M. tuberculosis spread between urban areas and marked recent population size expansion of the three largest genomic transmission clusters. Together, our findings highlight the urgency of strengthening TB control programs to reduce transmission risk within prisons, where, in Paraguay, incidence was 70 times that outside prisons in 2021.