The father-of-two was initially placed in the 'A' landing of the jail after being charged with the murder of Kelly on Friday last.
Sources said the authorities opted for the "safer" wing of the prison amid suspicions that Connolly's life was under threat from dissidents.
However, after gathering intelligence and speaking to prisoners on the 'E' landing, Portlaoise bosses decided it was safe for Connolly to join his RIRA associates.
Connolly made the move in recent days and will now spend Christmas with some of those known to him.
A source said: "There were initial fears that Connolly could be at risk after rumours spread that he had 'grassed' dissidents up.
"The matter was treated very seriously and a close eye was even kept on him while he was in the 'A' wing.
"However word seeped through to Connolly that he would be fine on the 'E' wing and he was happy to move over."
Prison bosses treated the alleged threat on Connolly's life seriously and instructed officers to establish whether he would be secure on the landing.
"After speaking to inmates, the decision was made to move him.
"When there are reports suggesting that someone's life could be under threat, you have to take that seriously," said a prison source.
On Friday night last, Connolly, of Bernard Curtis House in Bluebell, south Dublin, was charged with the Kelly's murder.
He was also charged with possession of a Glock semi-automatic pistol with intent to endanger life and membership of the Real IRA.
He will reappear before the three-judge non-jury Special Criminal Court via video link on December 20.
Kelly (65) -- who was a mentor to the likes of Eamon 'The Don' Dunne -- was gunned down near his home on Furry Park Road, Killester, 11 days ago.
Several individuals from the criminal underworld turned out at his funeral, at which former INLA leader Dessie O'Hare described Kelly as one of Ireland's "martyrs".
"He had a real sense of justice that was matched by his integrity to do something about that injustice," O'Hare said.
Kelly's son Paul also addressed the large congregation to say his father was a loving man. As both men resumed their seats in Killester's St Brigid's Church there was a loud round of applause.
The killing of Kelly near his home on December 3 was described as "evil" by Monsignor Alex Stenson.
The parish priest said the killing was "a dreadful act" which had violated his family and the entire community.
Gardai kept a low profile at the funeral. Connnolly is the only person to be charged with Kelly's murder.