Movies
The Lord of the Rings director had been embroiled in a row with the studio over his payment for the first film in the trilogy and was told he was "no longer needed" to direct the prequel.
However, he said in a statement that the two sides had reached an agreement and his Wingnut Films company could now "begin a new chapter with our old friends at New Line".
He said: "I'm very pleased that we've been able to put our differences behind us. We are delighted to continue our journey through Middle Earth."
The two Hobbit movies will be filmed simultaneously in 2009 and are scheduled for release in 2010 and 2011. A director has not yet been named.
Sir Ian McKellen has said that he would like to reprise the role of Gandalf in the films.
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