Lord of the Rings director Peter Jackson has been told he will not be employed on The Hobbit, the next film adaptation of a JRR Tolkien novel.
Jackson said he owed fans 'a straightforward account of events'
New Line Cinema, with whom he has been in dispute about income from the first Rings film, was not using him, he said.
Jackson had refused to discuss a Hobbit film until the case was settled but New Line said it now wanted to move on as it had "limited time" to make the film.
The Rings trilogy generated nearly $3bn (£1.6bn) in cinemas around the world.
Jackson's film company, Wingnut Films, brought a legal action against New Line resulting from an audit the company undertook on The Fellowship of the Ring.
Jackson, a devoted Tolkien fan, said he had been removed from the Hobbit project by New Line, who also hold the rights to a second Lord of the Rings prequel.
The Oscar-winning director said New Line would not allow him to make the films unless he dropped the lawsuit.
Fans of Tolkien and the Lord of the Rings films have long called for a film version of The Hobbit.
The book tells the story of how Bilbo Baggins took the ring from Gollum.
"We have always assumed that we would be asked to make The Hobbit and possibly this second film, back-to-back, as we did the original movies," Jackson's e-mail to TheOneRing.net fan website read.
"We assumed that our lawsuit with the studio would come to a natural conclusion and we would then be free to discuss our ideas with the studio, get excited and jump on board."
Meetings with film executives had been planned, Jackson explained, but then New Line called his manager to tell him that the company "would no longer be requiring our services on The Hobbit and the prequel".
New Line was "actively looking to hire another film-maker for both projects", Jackson added.
"This outcome is not what we anticipated or wanted, but neither do we see any positive value in bitterness or rancour.
"We now have no choice but to let the idea of a film of The Hobbit go and move forward with other projects."
Chris Pirrotta, co-founder of TheOneRing.net, said the fan site had a long-running relationship with Jackson.
Fans were "very upset", Pirrotta told Reuters. "We are seeing calls for everything from letter-writing campaigns to a boycott of the studio."
A spokesman for New Line declined to comment.