Cinema-goers enthralled by Peter Jackson's Lord of the Rings trilogy and desperate to see his proposed adaptation of The Hobbit might be set for a very long wait indeed.

For, today it emerged that the high-profile director has been officially cast into Middle Earth by film studio New Line, with whom he planned to make the motion picture.

The move by Bob Shaye, the New Line co-chairman, is the latest stage of an extraordinarily bitter legal dispute between Mr Jackson and New Line over money from the £2.1 billion Lord of the Rings franchise.

The dispute originally blew up last year when Mr Jackson, who earned $200 million from the Lord of the Rings franchise, claimed he was due millions more from merchandising, video and computer games sales income.

In November it escalated, with the director saying he had been told that New Line was actively looking for other directors to make The Hobbit, after the company called his manager to tell him that it "would no longer be requiring our services on The Hobbit and the prequel".

Mr Jackson claimed this outcome was "not what we anticipated or wanted", adding that New Line had prohibited him from making the films unless he first dropped the lawsuit.

But today the dispute reached breaking point, with Mr Shaye telling the Sci-Fi Wire: "He's got a quarter of a billion dollars paid to him so far, justifiably, according to contract, completely right.

"And this guy... turns around without wanting to have a discussion with us and sues us and refused to discuss it unless we just give in to his plan.

"I don't want to work with that guy any more. Why would I? So the answer is he will never make any movie with New Line Cinema again while I'm still working at the company."

Mr Jackson claims New Line has dumped him because it only holds the rights to The Hobbit, which tells of how Bilbo came by the ring of power, for a limited time, and cannot wait for the lawsuit to finish before starting to make it.

New Line's decision will devastate avid Tolkien fans, with almost 40,000 already signing a petition urging the film-makers to sign Jackson.

It could also present difficulties for New Line. A prequel, without Jackson’s guiding hand, may not receive such a warm welcome from the New Zealand authorities, who made location filming in the country’s spectacular locations cost-effective.

The Hobbit tells how Bilbo Baggins stole from Gollum the ring battled over in the later books while on an adventure in the Misty Mountains with Gandalf and an array of dwarfs.

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