Fantasy epic The Return of the King triumphed at the Bafta film awards, making it the hottest ever favourite to win best picture at the Oscars.
Jackson failed to win best director but won best film
The film won five awards including best film, but the best director prize went to Master and Commander's Peter Weir.
Lost in Translation stars Scarlett Johansson and Bill Murray won the best actor and best actress trophies.
Bill Nighy was the only Briton to win an acting award, taking best supporting actor for comedy Love Actually.
Master and Commander won four Baftas, but
The Return of the King also won the audience award for best film giving it the edge on the night.
The awards can be seen as an indicator of possible success at the Oscars, which take place later this month.
BAFTA BIG WINNERS
The Lord of the Rings: The Return of the King - 5
Master and Commander: The Far Side of the World - 4
Lost in Translation - 3
Cold Mountain - 2
As such, bookmakers have slashed the odds on The Return of the King to be named best picture at the Oscars, making it 1/6 favourite.
Jackson is also 1/5 favourite for the directing prize, but Weir's odds were cut from 20/1 to 8/1 after his Bafta triumph.
Jackson, collecting the Bafta overall best film award on Sunday, paid tribute to The Lord of the Rings author JRR Tolkien.
He said: "Although we were a bunch of Kiwis working with American money we were always aware we were looking after one of Britain's most-beloved books."
The Return of the King beat Big Fish, Cold Mountain, Lost in Translation and Master and Commander to win the best film prize.
Cold Mountain, which had received 13 nominations, walked away with just two awards, best music and best supporting actress for Renee Zellweger.
Johansson thanked her mother for "being there, taking me to auditions and buying me hotdogs afterwards".
OSCARS BEST PICTURE ODDS
1/6 - The Return of the King
6/1 - Mystic River
7/1 - Lost In Translation
33/1 - Master and Commander
33/1 - Seabiscuit
Lost in Translation director Sofia Coppola picked up the award on absent Bill Murray's behalf.
In a statement written by the actor read out by Coppola, he said it was a "huge surprise" to win.
Once again, the Baftas proved it would not always follow form or predictions.
Sean Penn had been the hot favourite to win the best actor award, while Scarlett Johansson had been tipped for her other nominated role in Girl With a Pearl Earring.
Actor Paul Bettany picked up Weir's Bafta for best director, saying: "Peter is a genius."
"He is one of the greatest directors of all time," he added.
Jackson had been expected to win the directing award.
After the ceremony he said: "The party will probably be huge, there are quite a few Kiwis over here and
the lager will be flowing like water."
Zellweger appeared emotional when she walked on stage, saying: "My heart, I'm sorry."
She thanked the crew "especially Jude (Law) and Nicole (Kidman). It was a privilege to work alongside you."
It was a night of glamour for the Baftas with Johnny Depp, Laura Linney, Holly Hunter, Sir Ian McKellen and Emma Thompson among the stars attending.
Renee Zellweger brought Cold Mountain some success
A further surprise winner was documentary Touching the Void which beat Cold Mountain and Girl With a Pearl Earring to win the Alexander Korda prize for British film of the year.
Producer John Smithson said: "We had one hell of a cold mountain but not quite the same budget."
Stephen Fry, hosting the awards, had warned winners to keep speeches short.
Referring to Janet Jackson's now infamous faux pas, he joked: "If you carry on too long my breast might accidentally pop out."
It was a good night too for British film maker Michael Winterbottom, whose refugee film In This World won the best foreign film award.
Veteran director John Boorman won the Academy Fellowship, the highest honour Bafta can give.