The four Islas Marias islands lie 120-kilometers (75 miles) off the northwest coast of Mexican state Nayarit.
The largest of those, Isla Maria Madre, has housed a prison since 1905 in which inmates, some of whom live with their families, are free to roam, though not leave.
"The island will be converted into a center for the arts, culture and the study of the environment, nature, flora and fauna," said Lopez Obrador, known by his initials AMLO, during a morning press conference.
The Islas Marias inmates are not considered dangerous and 200 of them will be released as they have served the minimum time required by law for their sentences.
The other 400 inmates will be relocated to prisons close to their homes.
AMLO said the the islands' "history of punishment, torture, repression (and) violation of human rights" would come to an end.
The islands are known for their great beauty and environmental riches.
The new cultural center will be named after a novel by Mexican writer and political activist Jose Revueltas.
He was imprisoned several times during his life, including at the penal colony, which was then a maximum security jail.
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