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Murphy, 75, whose beloved films include Goodbye Pork Pie, Utu, and The Quiet Earth, said Sir Peter was a phenomenal director whose big-budget success was beyond belief.
However, his influence had meant New Zealand's national cinema was "kind of shunted sideways, because Peter doesn't make New Zealand films, he makes films for Warner Brothers".
Murphy made his comments at a Massey University graduation ceremony earlier this week. He was in Palmerston North to receive an honorary Doctor of Literature degree for his contribution to the film industry.
His comments come in the same week Viggo Mortensen, who starred in The Lord of the Rings trilogy, described the filming process as sloppy and Sir Peter's use of special effects as overdone.
Murphy told assembled students that at the start of his career in the late 1970s the NZ Film Commission came into existence with a call to film-makers to "give us our own heroes".
"And for a few golden years there we did, in fact, do that - we gave the country its own heroes and they loved it.
"This other fellow turned up, a fellow called Peter Jackson, and he stole the film industry off us, a bit like the Grinch that stole Christmas."
After a series of smaller films Sir Peter went to Hollywood and pulled off the biggest movie deal in history in the form of The Lord of the Rings trilogy - all to be filmed in New Zealand.
Murphy spent a decade directing in Hollywood, including on films such as Young Guns II and Steven Seagal train thriller Under Siege 2, before returning home.
He said Sir Peter securing the Rings deal was "fairy tale stuff", and he had stayed flavour-of-the-month in Hollywood ever since.
That was "an extraordinarily difficult act", but a downside was the marginalisation of New Zealand cinema. "The films he makes have got very little to do with us culturally. It's easy to tell a New Zealand film - films like Smash Palace, Once Were Warriors and Boy.
"You can tell at a glance that The Hobbit is not one of them. That's not to put the achievement down ... that achievement is phenomenal."
Last night Murphy stressed to the Weekend Herald that he was not blaming Sir Peter for a decline in New Zealand cinema.
"His arrival on the scene has dominated to such an extent that in most people's perception, New Zealand film industry means Peter Jackson. He has done something that doesn't have any relationship with our own cultural development, or very little.
"In fact, in some ways I'm blaming the industry itself because no one emerged to challenge his position, in the sense that around the time of The Lord of the Rings the New Zealand film industry was not making Goodbye Pork Pies and Smash Palaces."
Murphy said Sir Peter's level of popularity in Hollywood could not last forever, and he hoped eventually the film-maker would start making New Zealand films again.
"Nobody stays flavour of the month for long, and Peter's been flavour of the month for about 14 bloody years, he can't last much longer over there.
"It's inevitable that that business will collapse ... and then he might come back and make New Zealand films, that would be a bloody good thing."
Matt Dravitzki, spokesman for Sir Peter, declined to comment on the speech.
- Nicholas Jones, NZ Herald