Could Middle Earth move to Middle England?

New Zealand's reincarnation as Middle Earth transformed the country's image and attracted floods of tourists keen to visit the locations where the Lord of the Rings trilogy was filmed. Following a protracted dispute with the actors' union, however, the rugged landscapes look set to be abandoned – possibly in favour of a British studio.

The latest Tolkien project, The Hobbit, was due to be filmed in New Zealand, but its director, Peter Jackson, said yesterday that Warner Bros – its major backer – was poised to move the US$500m (£318m) production offshore.

Jackson, a New Zealander who directed the phenomenally successful Rings series, is incensed by Equity NZ's blacklisting of The Hobbit – a two-film, 3D Rings prequel – over an argument about pay and conditions. Although the union has now lifted the ban, which was supported by British Equity and the powerful US Screen Actors Guild, the Oscar-winning director said Warner Bros's confidence had been undermined. Studio executives are flying to New Zealand next week to make arrangements for a move, according to a statement by Jackson's production company, Wingnut Films. His wife and co-producer, Fran Walsh, told Radio New Zealand yesterday that Warners wanted to shift production to Leavesden Studios, near Watford, where the Harry Potter movies were filmed.

"They've got a huge studio that Harry Potter have vacated, that they own... that they say would be perfect for us," she said, adding that other English locations were being scouted. Previously, Scotland and Ireland have been mentioned as possibilities, along with Canada, Australia and eastern Europe.

The move would be a huge blow to the New Zealand film industry, which has blossomed and prospered over the past decade. In a television interview, Jackson said the NZ$3bn (£1.4bn) industry was on its way to "possibly being stuffed" thanks to the Hobbit debacle. "It appears we now cannot make films in our own country – even when substantial financing is available."

The Prime Minister, John Key, who has fought to retain the blockbuster production, said yesterday that losing it would be a "tragedy" for New Zealand. He hopes to meet Warner Bros executives next week in a last-ditch attempt to change their minds.

Filming of The Hobbit has already been delayed for years by rows over distribution rights, reported budget blow-outs and the departure of the original director, Guillermo del Toro. Helen Kelly, president of the New Zealand Council of Trade Unions, claimed the move offshore was motivated by tax breaks – an accusation denied by Ms Walsh.

Others in the industry are anxious to keep The Hobbit. An estimated 1,500 technicians, designers and other film workers marched through Wellington on Wednesday, waving signs stating "Ireland is not Middle Earth" and chanting "Don't kill Bilbo". Bilbo Baggins, a hobbit, is the story's main protagonist, who shares his world with wizards and elves.

New Zealand's tourism industry also fears a knock-on effect. Such is the draw of Tolkien that the North Island town of Matamata, where the Hobbiton set was built, still receives 200,000 visitors a year, although the last Rings film was released seven years ago. Jackson said: "Seemingly overnight, NZ Equity shredded the reputation of a burgeoning industry which has been 40 years in the making. This will be the start of a domino effect, as word of New Zealand's unstable employment environment registers with film investors and studios worldwide."