Dec. 18 (Bloomberg) -- Time Warner Inc.'s New Line Cinema settled litigation with ``Lord of the Rings'' director Peter Jackson and will make two more movies with him based on the children's fantasy novel ``The Hobbit.''

Metro-Goldwyn-Mayer Studios Inc. will help finance and distribute the films, New Line said today in a statement. Jackson will produce the movies with screenwriter Fran Walsh.

Jackson sued New Line in 2005, claiming the studio miscalculated his share of receipts for the ``Lord of the Rings'' trilogy, which came to $2.91 billion worldwide. The ``Hobbit'' films, scheduled for release in 2010 and 2011, are also based on the J.R.R. Tolkien books about the adventures of imaginary creatures.

``We resolved all the issues between us,'' said Michael Lynne, co-Chief Executive Officer of New Line in an interview. ``The slate is wiped clean so we can move forward.''

Senior U.S. District Judge Ronald Lew in September refused to throw out the lawsuit. He denied eight of 11 motions in Los Angeles federal court by New Line to dismiss Jackson's claims. Terms of the settlement weren't disclosed in the statement.

Time Warner shares, down 24 percent this year, rose 15 cents to $16.65 at 4 p.m. in New York Stock Exchange composite trading. Time Warner, the world's largest media company, is based in New York.

Jackson won a best director Academy Award for ``The Lord of the Rings: Return of the King,'' the third installment of the trilogy. ``Return of the King'' grossed more than $1 billion, second only to ``Titanic,'' which took in $1.13 billion.

`Spectacular Vision'

``Peter laid out a spectacular vision for `The Hobbit' and we realized we only wanted to do this project with him,'' Harry Sloan, chief executive officer of Los Angeles-based MGM, said in an interview. ``All sides realized creating a masterpiece was more important than what they were arguing over.''

In the past six months, MGM helped bring New Line and Jackson together to resolve their issues and come to terms on the new agreement, Sloan said. ``The Hobbit'' will be MGM's second franchise after the ``James Bond'' movies, Sloan said.

New Line's ``The Golden Compass'' opened to lower-than- expected box office sales, according to Brandon Gray, president of researcher Box Office Mojo LLC. The movie cost about $150 million to make and has garnered $91.7 million in worldwide ticket sales since its Dec. 7 release.

The two ``Hobbit'' movies will serve as prequels to the ``Lord of the Rings'' trilogy, with the second film acting as a bridge to the first installment of ``Lord of the Rings,'' Lynne said.

The movie will likely be shot in Wellington, New Zealand, he said. Starting in January, New Line will discuss with Jackson and Walsh, who are married, elements such as the movies' director and cast. He wouldn't reveal monetary terms of the collaboration.

Work on the film's script can't begin until Hollywood studios and television broadcasters reach a new agreement with striking writers represented by the Writers Guild of America, Sloan said.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net

Last Updated: December 18, 2007 16:30 EST