Producer Sir Peter Jackson said studio Warner Brothers intends taking the adaptation of the JRR Tolkien novel to another country because of industrial strife over actors' conditions.
New Line Cinema, a Warner Brothers subsidiary, in a statement this morning said New Zealand Actor's Equity caused the company substantial damage and disruption, forcing them to consider other filming locations.
"Alternative locations are still being considered," it said.
But Prime Minister John Key and Economic Development Gerry Brownlee hope the problem can be resolved, and have offered to meet with studio representatives when they arrive next week to save the $2.8 billion film industry.
Mr Brownlee told Radio New Zealand the Government would look at clarifying employment law in relations to an events-based period of time like the production of the movies.
He referred to the Supreme Court case of James Bryson, a special effects employee for The Lord of the Rings at Sir Peter's production company Three Foot Six, who was made redundant. The court ruled Mr Bryson was an employee, not a contractor.
"I think one of the things we are going to have to consider is whether or not the issues that was raised in the court case...can be sorted out," Mr Brownlee said.
"Can we determine the difference between an employee and a contractor in a way that makes clear that the sort of industrial action that has been threatened by the union can't be carried through."
Mr Key told NZPA he understood Warner Brothers' main concern was industrial uncertainty, not the 15 percent tax break New Zealand gives to film companies.
Other countries are reported to have offered 30 percent in bids to get the movies.
"My concern is that if Warner Brothers deems New Zealand is not a good place to make movies, then there is a real risk other major film production companies will also believe that to be the case," he said.
Finance Minister Bill English would not comment on whether the Government might look to add some tax sweeteners if the issue was raised by the studio.
Mr Key said: "Warner Brothers has already invested $100 million in The Hobbit movies so they have, historically at least, been of the view that New Zealand is a good place to make movies and it's only the actions of the unions that encouraged them to start looking at other locations."
He thought it was "reprehensible" that such a successful growth area as the film industry could be destroyed by union action.
The union, Actors' Equity, yesterday rescinded its advisory to members not to accept work on the film.
The ban had been put in place because the films makers refused to enter into a union-negotiated agreement.
New Line today denied a Council of Trade Unions report that the boycott had been lifted on Sunday and the union was asked to keep it quiet.
"It was not until last night that we received confirmation of the retractions from SAG (Screen Actors Guild), NZ Equity and the Aftra (American Federation of Television and Radio Artists) through press reports. We are still awaiting retractions from the other guilds," the production company said.
The union had asked New Line to participate in union negotiations as a condition for the ban retraction, but the company had refused to do so, and will continued to refuse to do so, it said.
Actors' Equity president Jennifer Ward-Lealand said yesterday the union could provide "absolute certainty" that industrial issues were no longer a barrier and its industrial organiser, Frances Walsh, said a clear undertaking had been given that there would be no industrial action during filming.
Sir Peter was scathing about union action and said previous action had undermined Warner Brothers' confidence in the New Zealand film industry.
He said lifting the advisory would not help, because the damage had already been done.
Mr Key wasn't so pessimistic.
"I don't think we should write off our chances of retaining the movies," he said.
"There's work to be done and the Government hasn't given up trying to do its best to secure the movies."
