Fantasy becomes reality for Rings fans as Jackson agrees to produce Hobbit films

The Tolkien community was in hysterics yesterday. At least that was the verdict on one of the leading Hobbit websites following the announcement in Los Angeles that Peter Jackson, director of the $3bn-plus trilogy The Lord of the Rings, had signed up to produce two films based on The Hobbit, expected to go into production in 2009.

A year ago Jackson split with the studio behind the films, New Line Cinema, after a dispute over money. But the bad blood has been resolved, according to a statement.

"I'm very pleased that we've been able to put our differences behind us, so that we may begin a new chapter with our old friends at New Line," Jackson said. "We are delighted to continue our journey through Middle Earth."

New Line's co-chairman, Bob Shaye, said: "We are very pleased we have been able to resolve our differences." He noted the "passion, care and talent" Jackson would bring to the films.

Last year studio representatives telephoned Jackson's production company to tell him that his services would not be required for the new films, which will be based on JRR Tolkien's The Hobbit, the fantasy novel that precedes The Lord of the Rings trilogy.

The dispute arose after Jackson sued New Line, claiming that the studio had failed to pay the director his share of the profits from the first film in the trilogy.

In January the dispute was alive and kicking, with Shaye saying that Jackson would "never make any movies with New Line Cinema again while I'm still working for the company".

"I don't care about Peter Jackson any more," Shaye told the Sci Fi Channel. "He wants to have another $100m or $50m, or whatever he's suing us for. He doesn't want to sit down and talk about it. He thinks we owe him something after we've paid him over a quarter of a billion dollars ... Cheers, Peter."

But that was then. Jackson is idolised by many Hobbit fans for his treatment of The Lord of the Rings, and the studio risked alienating the films' fan base by not resolving the dispute over The Hobbit.

However, Jackson, who in the interim announced that he would make a Tintin trilogy with Steven Spielberg, will not direct the new Hobbit films. Instead he will serve as executive producer.

The identity of the director is still to be revealed.

Following the model of The Lord of the Rings films, the two Hobbit films will be shot simultaneously, with the first set for release in 2010, and the second the following year.