Rival studios must resolve distribution issues before the Tolkien classic can be made. Some key ‘Lord of the Rings’ stars indicate support for the project.

The Hobbits have returned to the Shire, Gandalf has hung up his cloak and the Oscars are looming. But the battle for Middle-earth is far from over.

As “Lord of the Rings” fans come to terms with the end of the movie trilogy, many are holding out hope that director Peter Jackson will return to the J.R.R. Tolkien classics and make a film based on the first book, “The Hobbit.” They may be in luck – Jackson and key cast members recently have made noises that they want to take on the cult novel.

But Time Warner Inc.’s New Line Cinema – the studio behind the “Rings” – is facing a potential battle to get “The Hobbit” to the big screen.

Under a series of complicated deals made over the past 30 years, New Line has the rights to make “The Hobbit,” but a competitor, Metro-Goldwyn-Mayer Inc., controls the rights to distribute the movie in most major markets. No studio would make a movie of this scale without at least some of the distribution rights, so New Line’s only option is to haggle with MGM. Unsurprisingly, MGM – which these day makes few big-budget movies – is rubbing its hands with glee.

For New Line, it may be worth the battle. The first three films have reaped almost $3 billion around the world, dropping an estimated $1 billion to the studio’s bottom line. “The Lord of the Rings: The Return of the King” also received 11 Oscar nominations this year, including Best Picture and Best Director.

But if history is any indication, “The Hobbit” could have some ways to go. A string of high-profile films have stumbled over rights snafus, and “Lord of the Rings” itself took many years to reach the movie theaters. Tolkien, an Oxford professor who dreamed up the idea of the hobbits while marking exam papers, sold the rights to his Middle-earth tales, including “The Hobbit,” to MGM’s United Artists in 1969 for an estimated $10,000 to pay off a tax bill. MGM subsequently sold most of the film rights to Hollywood producer Saul Zaentz, who made an often-derided animated “Lord of the Rings” in 1978.

After a series of twists and turns that included settling a lawsuit with United Artists, Zaentz eventually sold the rights to New Line after approving a treatment put forward by Jackson. However, MGM retained the distribution rights for “The Hobbit.” It’s unclear what rights Zaentz has going forward; he declined to discuss the matter.

MGM is no “shireling” when it comes to negotiating such deals. Owning one of the biggest film libraries in Hollywood, MGM often has found itself at the center of disputes over movie rights, including an eight-year legal battle over “Spider-Man,” which it eventually settled. This time, the rights to “The Hobbit” present a potential gold mine at a moment when the studio may be looking for a merger partner.

For its part, New Line says it will pursue a deal on “The Hobbit” only if Jackson takes on the project. The 42-year-old director invested seven years of his life making the “Rings” trilogy, shooting the three installments back-to-back.

“A big reason for the franchise’s success has been Peter. … He’s so passionate about the subject and we feel very loyal to him,” said Bob Shaye, New Line’s co-chairman.

With his long, curly hair and casual attire, Jackson often jokes that his time on the “Rings” has turned him into a hobbit. But he is moving on to new projects this year, starting this summer with “King Kong” for Vivendi Universal SA’s Universal Pictures. The New Zealand-born director could take on “The Hobbit” near the end of 2005. If that were the case, New Line would need to sort out the rights issue soon.

“I am certainly interested in making ‘The Hobbit,'” says Jackson, wearing his now-trademark knee-length shorts in a swanky Hollywood restaurant. “I definitely wouldn’t want to see anyone else do it.”

Ian McKellen, the 64-year-old British actor who plays Gandalf, is also eager to return to his wizard’s hat and gray beard. Aside from Gandalf, there are only two key characters from the “Rings” who are also central to “The Hobbit”: the hobbit-turned-bad-guy Gollum (played by Andy Serkis) and Frodo’s elderly cousin Bilbo Baggins, who has a small role in the “Fellowship of the Ring,” played by Ian Holm, as a 111-year-old hobbit. Frodo himself doesn’t figure into the story.

If book sales are anything to go by, there’s certainly appetite for another film. Tolkien’s American publisher, Houghton Mifflin, says 24 million copies of the “Rings” and “The Hobbit” were sold in 2001 and 2002 in the U.S. alone. Fans have since been digging deeper into the Tolkien trove, with sales of his less-popular Middle-earth tale, “The Silmarillion,” climbing in the past year – a sure sign that fans are far from sated.

“Jackson’s films have led a Tolkien resurgence among Americans and now they want more,” says Clay Harper, Houghton Mifflin’s Tolkien projects director.

New Line and MGM have yet to sit down to seriously discuss “The Hobbit.” When they do make it to the negotiating table, it is likely that MGM will want to retain some sort of cut. A possible proposal could include the two sharing the costs and splitting the profit, with New Line taking the domestic distribution rights and MGM taking the international rights. Such a split isn’t unusual – in the case of the “Rings,” New Line used independent distributors for the international release.

“We’re open to any discussions that the other rights holders would like to have,” says MGM Vice Chairman Chris McGurk.

New Line says that if it can’t do a deal with MGM, it may go back to the drawing board and either its own prequel filling in the period between “The Hobbit” and the first “Rings” book, or a sequel that follows on from “Lord of the Rings: The Return of the King.” However, that option faces a number of potential complications, including the Tolkien family. While the family still benefits from sales of the books, they signed away their say on any films based on “The Lord of the Rings” or “The Hobbit” when Tolkien sold the rights to MGM. But a new prequel or sequel could be another matter.

Starting from scratch with a new story also would involve extending Tolkien’s fantasy world without the Tolkien vision, and his fans may object. “To take some elves and short guys with furry feet and invent new challenges for them that aren’t in the source material … would be a betrayal of Tolkien and Jackson’s achievements,” says Houghton Mifflin’s Harper.