The men, on day release from HMP Hewell in Redditch, were on a scheme run by local charity Batchley Support Group.
Ms Smith said the prisoners "didn't have anything else on" and she made a donation to the charity for their time.
But the prison service said "under no circumstances should prisoners be taken to work in a private home".
Ms Smith stepped down as home secretary in June 2009 following the revelation that she had inadvertently claimed parliamentary expenses for pornographic films ordered by her husband.
She lost her seat as Labour MP for the Worcestershire constituency of Redditch in the 2010 general election.Phone-in
Since leaving politics, Ms Smith has worked on a number of media projects, including making a documentary on pornography for the BBC.
On Wednesday morning - when the story about the decorating work appeared on the front page of the Sun newspaper - she was hosting a phone-in on LBC radio covering topics including the effectiveness of community punishments.Continue reading the main story
I know that when it's anything to do with me, the papers like to put probably the very worst spin they possibly can on it”End Quote Jacqui Smith Former Labour MP She told listeners: "You may or may not have seen the front of the Sun, but they are having a bit of a go at me today because two prisoners who were coming towards the end of their sentence and doing work experience carried out about three hours' work at my house doing a bit of decorating.
"It hadn't been cleared with the prison authorities in advance and they've now launched an inquiry and the Sun is having a go at me.
"Well, just to set, I hope, the record a little bit straight, these are guys that were working with a local community organisation. They do a whole range of odd jobs and working in the local community.
"On one day, when actually they didn't have anything else on, they did come to my house and do three hours' worth of painting, for which me and my husband made a donation to the community group."
She added: "I think it's a bit hard on the community organisation because I think they were doing a really good job.
"But I know that when it's anything to do with me, the papers like to put probably the very worst spin they possibly can on it and in my view, that's what the Sun has done today."Rehabilitation scheme
The two men are believed to have carried out the painting for Ms Smith in July while on a rehabilitation scheme ahead of their release from custody.
"The decision to provide prisoners for this work was taken without consultation with HMP Hewell or the Ministry of Justice and was a mistake," a prison service spokesman said.Continue reading the main story
The group does agree in retrospect that undertaking work on Ms Smith's home may not have been the best use of prisoners' time”End Quote Batchley Support Group "Offenders should work on projects which help the whole community.
"The scheme has been suspended while a full internal investigation is undertaken."
In a statement, Batchley Support Group said the resettlement-to-work project had been agreed with HMP Hewell some time ago and current staff had "not found any documentation stipulating exactly what prisoners can or cannot do as part of the agreement".
"Batchley Support Group weren't aware of the scope of the restrictions and Ms Smith and Richard Timney [her husband] certainly wouldn't have been aware of these," it said.
"However, the group does agree in retrospect that undertaking work on Ms Smith's home may not have been the best use of prisoners' time, though it should be pointed out that the donation made for the work has enabled Batchley Support Group to carry out much-needed work in the community."
The charity said the prisoners worked "for a maximum of three hours each on one day", and on the previous day, two inmates also visited Ms Smith's house to collect some plants she had donated to the group.
"These plants were to be used as part of a pond restoration project we have been working on with Hewell Prison," it added.'Scheme abused'
The prison service said "anybody involved with resettlement work with prisoners will have been made aware of the restrictions in place".
"If prisoners have no work, it is made clear that they should been returned to their prison. Under no circumstances should prisoners be taken to work in a private home."
Ms Smith's Conservative successor in Redditch, Karen Lumley, said she was "extremely disappointed that a community scheme like this has been abused in this way".
"I find it very sad that this scheme has now been suspended, but hope that with stricter guidelines it may continue in the future," she told the BBC.
"I also hope that the Batchley Support Group who also do a fantastic job look closely at their procedures so they are not brought into disrepute."